What Is a USDA Loan and Who Qualifies?

December 21, 2020 · 6 minute read

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What Is a USDA Loan and Who Qualifies?

When you think of the USDA, what comes to mind? Beef? School lunches? Amber waves of grain? Well, yes, there’s all that, but the U.S. Department of Agriculture also provides programs that help qualified people buy homes in rural parts of the country as well as homeowners who want to renovate or repair their homes.

Although the USDA also offers rent support under certain circumstances, this article will focus on the three types of home buying/repairing programs:

•   Single Family Housing Direct Home Loans
•   Single Family Housing Guaranteed Loan Program
•   Single Family Housing Repair Loans and Grants

Here are specifics of each of these USDA loans.

Single Family Housing Direct Home Loans

This is a subsidy program that’s available in certain rural areas (“rural” can be defined pretty broadly for each of these USDA programs). It focuses on people who have “low and very low” income , with the goal to help them have “decent, safe, and sanitary housing.”

The amount of the subsidy depends on the adjusted income of the family, and it reduces the family’s mortgage payment for a certain amount of time.

USDA loan eligibility for this program includes an adjusted income that’s at or below what’s required for the geographical area where the house is located. They must currently be without housing that’s considered safe, sanitary, and decent, and have the ability and willingness to repay the mortgage.

In addition, they must be unable to qualify for loans elsewhere; agree to live in the home as their main residence; meet citizenship requirements (or eligible noncitizen ones); legally be allowed to take on a loan; and not be suspended from participating in federal programs.

The home itself must meet certain requirements for USDA loan eligibility. It must:

•   Typically have no more than 2,000 square feet
•   Not have an in-ground swimming pool
•   Not have a market value that exceeds the loan limit for the area
•   Not be used to earn income from the home

Typically, no down payment is required, although if borrowers have more assets than are allowed, they may need to use part of them toward the purchase. The rate is fixed and, when taking payment assistance into account, could be as low as 1%. The payback time can be up to 33 years, or 38 years for applicants with very low income.

Funds can be used to purchase a home, as well as to build, repair, renovate, relocate, and more. Once the title is out of the borrowers’ names or they no longer live in the house, they must repay part or all of the subsidies received.

This online eligibility tool can help potential borrowers see if they might qualify.

Single Family Housing Guaranteed Loan Program

This program assists approved lenders so that people in households with low to moderate incomes (no more than 115% of median household incomes) can buy homes in eligible rural areas.

The program has features in common with Direct Home Loans, including that the homes need to be considered decent, safe, and sanitary.

Applicants who qualify can purchase, renovate, build, or rehabilitate a home without needing a down payment.

Single Family Housing Repair Loans and Grants

This program is also called the Section 504 Home Repair Program, and it’s somewhat different from the first two USDA loan programs. This program targets homeowners with very low incomes, providing them with loans to improve, repair, or otherwise modernize their homes.

The program also offers grants if the applicants are elderly with very low incomes—and if the money will be used to fix hazards to health and safety. To qualify, the borrower must own the home and live in it. Income must be less than 50% of the median income in the area, and they must not be able to find affordable credit through other venues.

To qualify for a grant, the applicant must be at least 62 years old and unable to pay for the repair.

There are limits on both the loans and the grants, as follows:

•   Maximum loan amount: $20,000
•   Maximum grant amount (lifetime limit): $7,500. If the home is sold within three years of receipt of a grant, the money must be repaid
•   Maximum per person: $27,500, if they qualify for both the loan and grant

Loan terms can be up to 20 years, with a fixed 1% interest rate.

For more information about what qualifies as a USDA loan or details about how to apply, applicants should contact their state office .

Pros and Cons of USDA Loans

This section will focus on the Single Family Housing Guaranteed Loan Program, not the subsidies, grants, and home repair programs available through the USDA.

Many of the pros of the program have already been mentioned in their descriptions. They include the ability to get a loan without needing a down payment and the low interest rates. In addition, pros include these:

•   Although USDA lenders will review credit scores and will have standards, there isn’t a minimum FICO® credit score required to qualify. This means that a less-than-ideal credit history may not prevent the loan from going through.
•   The 2% guarantee fee can be rolled into the loan if it would be too difficult for the borrower to pay it out of pocket.

Some of the cons of USDA loans are also mentioned in the program descriptions, including that homes must be in eligible areas with income limits. The home must be a primary residence, with an in-ground pool disqualifying it from consideration.

Additional cons include that:

•   Only certain lenders can offer the program.
•   The guarantee fee of 2% can be pricey.
•   If homeowners decide to refinance, they can’t get cash out of the home for other purposes.

Other Types of Mortgage Loans

In general, if household income is more than 115% of the average income for the area, borrowers can’t qualify for a USDA loan. The income of the entire household is considered, even if someone isn’t going to be on the mortgage note. This is just one reason someone might need to seek another form of a mortgage.

Three broad types are:

•   Conventional loans: These are provided by banks and other private lenders and are not government-backed loans. This is the most common type of mortgage today. Borrowers typically need to have a down payment of 5% to 20%, and the lender usually looks at debt-to-income ratio and credit scores when deciding whether to grant the loan.
•   Federal Housing Authority loans: Lenders that issue these loans are insured by the FHA, and it can be easier to qualify for this type of loan than a conventional one. Lending standards can be more flexible and, with a credit score of 580 or more, the borrower might qualify for a down payment of only 3.5%. Note that mortgage insurance for an FHA loan can be high.
•   VA loans: These loans are provided by the Department of Veterans Affairs for qualifying veterans, active military members, and their families. The loans are provided by banks and other lenders but are guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Loan limits, though, can be lower.

Different types of mortgage loans have various benefits and disadvantages. As a home buyer it is beneficial to understand what is applicable to your situation.

First-Time Homebuyer Programs

Borrowers who qualify as first-time home buyers (definitions of that term can vary, based on the program) can receive benefits that make it easier for them to buy that first home. Besides programs offered by FHA and VA , these include:

•   Freddie Mac’s Home Possible program and Fannie Mae’s 97% LTV . The programs offer down payments as low as 3% for buyers who have low to moderate incomes.
•   The Fannie Mae HomeReady mortgage program . Borrowers who undergo educational counseling can get help with closing costs.
•   It can make sense for borrowers to contact their state housing agency to see what programs are currently available for first-time homebuyers.

Affording That Home

No matter which type of mortgage is chosen, and whether you’re more rural or citified, it can make sense to save up money, whether for a down payment and closing costs or to have funds for moving, renovating, and so forth.

Here are several strategies to consider, including asking for a raise, starting a side hustle, paying off bad debt, requesting house money as a wedding gift, and talking to relatives about a loan.

To qualify for a mortgage, it’s also important to take good care of credit scores and to pay down debt to comfortably afford the house that’s desired. Once the decision has been made to buy that first house, it can help to get preapproved for a loan and gather the documentation that will likely be needed to get that “yes.”

Buying a house doesn’t have to be stressful, and at SoFi a down payment may be as low as 10%. SoFi offers competitive rates and plenty of options for home mortgages to fit a wide range of budgets.

Applying is fast and easy—and it can be done entirely online.

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