What is a USDA loan?
USDA loans are mortgages issued or guaranteed by the United States Department of Agriculture. These programs, also known as Section 502 or 504 loans, are reserved for low - or moderate-income people who want to buy homes in designated rural areas.
According to the Housing Assistance Council, 97 percent of U.S. land is within the range of USDA loan eligibility, and about a third of all Americans currently live here.
However, relatively few people have taken advantage of these loans, with the USDA estimating that only 99,000 borrowers currently have these mortgages.
Many people may think that these loans are only available in extremely remote areas, such as farmland, when the reality is that USDA mortgages are surprisingly versatile. They can be used to buy townhouses and single-family homes, finance new construction, or renovate existing homes.
"The USDA home loan is a very good option for qualified home buyers and is not limited to rural properties such as farms," said Tan Tunador, senior loan officer at Atlantic Coast Mortgage in Loudoun County, Virginia.
There are three main types of USDA loans, each with its own unique benefits and pool of eligible borrowers:
1. Direct loans
The loans come directly from the USDA and do not involve private lenders. They are usually reserved for very low-income applicants with very generous conditions, such as 0% down payments and very low interest rates.
2. Guarantee loans
The mortgages are made by private lenders vetted and approved by the USDA, which then guarantees the loans.
That, in turn, reduces the risk for lenders, since the government will repay the lender if the homebuyer defaults.
This allows USDA-approved lenders to offer borrowers highly attractive loan terms, including zero down payments and low interest rates.
3. Maintenance/renovation loans and grants
These grants allow homeowners to make repairs or improvements to their homes. It is also available to low-income seniors who need upgrades for health or safety reasons.
A big problem with USDA loans is that they are geographically and income-constrained: the property must be in a designated rural area, and the borrower's income cap varies region-by-region. Here's a breakdown of the restrictions:
Geographical limitations. Homes must be located in eligible rural areas with a population of no more than 35,000.
Income threshold. Borrowers must meet certain income requirements based on where they live, and if they exceed those income thresholds, they don't qualify.
Eligibility for USDA loans will vary depending on the type of loan a borrower takes out.
Direct loan applicants certainly do not require decent, safe and hygienic housing.
It must be impossible to obtain funding from other sources.
Adjusted income must be at or below the low income limit for the district.
Must meet citizenship or qualified non-citizen requirements.
Consent must be given to the occupation of the dwelling as the principal resident and not for income-generating activities.
Homes purchased must be no larger than 2,000 square feet or have an in-ground swimming pool.
Applicants for guaranteed loans are required to have a household income of no more than 115 percent of the area's median income.
Applicants must have a steady income and enough savings/assets to pay the mortgage for at least 12 months.
Must agree to occupy the residence as the main residence.
Must be a U.S. citizen, a U.S. noncitizen national, or a qualified alien.
The requirements for repair/renovation loan and grant applicants must be homeowners and live in the home for which they are applying for the loan.
Unable to get affordable credit elsewhere.
Household income does not exceed the county's "very low income" threshold (50 percent of the area's median income).
For grants, you must be 62 or older.
Funds must be used to repair or improve the house or to eliminate health or safety hazards.
How much does the USDA loan lend?
How much you can borrow depends on what kind of USDA loan you want to get.
Direct Loans: This will vary, but you can use the USDA's self-assessment tool to get an estimate based on factors initially reviewed, such as your income, debt, property location, and number of residents.
Secured loans: Because you will be working with a lender, there is no cap on how much you can borrow, as it will be determined by your credit score, debt-to-income ratio, and other criteria established between you and the lender.
Repair/Renovation Loan: The maximum loan amount is $40,000 and the maximum grant amount is $10,000. In some cases, applicants may qualify for both a loan and a grant, with a final payment of $50,000 for such applicants.
What is the interest rate on USDA loans?
Compared with the current interest rate of nearly 7 percent on conventional loans, the USDA loan rate is very lenient. While the exact interest rate will vary depending on the borrower and the deadline, here's what borrowers can expect:
Direct loans. As of November 1, 2022, the current interest rate for USDA direct loans to low - and very low - income borrowers is 3.25%.
This rate is fixed for the life of the loan and can be repaid over 33 to 38 years, longer than the typical 30-year fixed mortgage.
Guarantee a loan. The interest rate will be determined by the borrower with a USDA-approved lender, but may generally be slightly lower than a traditional loan from a traditional lender.
Loan for repair/renovation. The interest rate is 1% and the repayment period is 20 years.
Where can I find a USDA loan?
Homebuyers who want to apply for a USDA loan can check with their local rural development agency, which can connect them with a housing specialist or a USDA approved lender.
Potential borrowers may also want to research the eligibility requirements, especially in terms of income limits and the area they want to buy in. But don't be afraid to ask for help.
