With the help of a USDA loan, owning a home in a rural area might be more achievable than you think. In fact, nearly 165,000 people applied for a USDA loan in 2020, according to the Consumer Financial Protection Bureau. If you're already living in a less populated region or considering buying a home away from urban centers, you may qualify for a USDA loan with below-market interest rates and no down payment required.
What is a USDA Loan?
USDA loans are a zero down payment mortgage option backed by the United States Department of Agriculture (USDA) and offered through USDA-approved lenders. These loans are designed to help low- to moderate-income individuals and families purchase, build, repair, or refinance homes in rural areas.
Types of USDA Loans
The USDA offers several Rural Development Single-Family Housing Programs aimed at making homeownership accessible. These include:
- Guaranteed Loan: This loan helps USDA-approved lenders provide 100% financing to low- and moderate-income households for buying, building, or improving a primary residence in rural areas.
- Direct Loan: Funded by the USDA, this option assists low- and very-low income borrowers who might not qualify for conventional financing. Loan terms range from 33 to 38 years, depending on income.
- Repair and Rehabilitation Loan (Section 504): Designed for very-low income homeowners, this loan helps cover repairs and improvements that remove health or safety hazards from the home.
- Rural Housing Site Loan: This loan is available to nonprofit organizations to purchase land and develop housing for low- to moderate-income families in rural areas.
How Do USDA Loans Work?
USDA loans aim to provide affordable homeownership in rural communities across the U.S. Guaranteed Loans are offered through lenders with a 90% loan note guarantee from the USDA, allowing lenders to provide 100% financing. Direct and Repair Loans are funded directly by the USDA, offering terms and assistance that reduce financial barriers for eligible borrowers.
USDA Loan Benefits
USDA loans offer several advantages over other mortgage types, particularly for those living in rural areas:
- No down payment required
- Interest rates as low as 1% for some programs
- No mortgage insurance
- Lower credit score requirements
- Seller concessions can cover up to 6% of closing costs
How to Qualify for a USDA Loan
Eligibility for a USDA loan depends on several factors:
- Income limits: For Guaranteed Loans, income cannot exceed 115% of the median household income in your area. Direct and Repair Loans are for those with even lower income levels.
- Property requirements: The property must be a single-family home and your primary residence. Direct Loans have additional restrictions, such as a size limit of 2,000 square feet.
- Citizenship: You must be a U.S. citizen, eligible noncitizen, or qualified alien.
What Areas Qualify for USDA Loans?
USDA loans are available for homes located in designated rural areas. These are defined as:
- Areas that are not part of or closely connected to an urban area
- Towns or places with a population under 10,000
- Some towns with populations between 10,000 and 20,000, depending on certain factors
The USDA periodically reviews these areas to ensure they still qualify as rural.
How to Apply for a USDA Loan
To apply for a USDA Guaranteed Loan, you'll work with a USDA-approved lender. Direct and other USDA loans are processed through your state's Rural Development office, which can vary in processing times based on available government funding.
USDA Loan Rates
Interest rates for USDA loans are typically lower than conventional mortgages, with Direct Loans offering rates as low as 2.50% as of 2022. Some borrowers may also qualify for payment assistance, bringing rates even lower.
Closing on a USDA Loan
The closing process for a USDA loan typically takes 45-60 days. USDA loans require closing costs, which range from 3-6% of the purchase price, but you can negotiate to have the seller cover up to 6% of those costs.
Is a USDA Loan Right for Me?
USDA loans are ideal for low- to moderate-income buyers in rural areas who may not qualify for conventional loans. If you’re considering purchasing or refinancing a home in a rural community, speaking with a USDA-approved lender can help you determine if this loan option is a good fit for you.
