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 helps people buy, build, and repair homes in rural areas of the country.
USDA loans have many advantages, but eligibility largely depends on borrower income and home location.
Among the many USDA programs, the agency also offers loans and grants to very low-income homeowners to repair their homes. Let’s look at the details of three programs.
How USDA Loan Programs Work
USDA Rural Development’s housing programs give individuals and families the opportunity to buy or build a rural single-family home with no money down, repair their existing home, or refinance their mortgage under certain circumstances.
The USDA promotes homeownership for low-income families and economic development in rural areas.
USDA loans are available to eligible first-time and repeat buyers, and millennial homebuyers to retirees, for primary residences.
Single Family Housing Guaranteed Loan Program
This program is the one that most people think of when they hear about USDA loans.
The USDA guarantees 30-year fixed-rate loans originated by approved lenders so that people in households with low to moderate incomes can buy homes in eligible rural areas . (You’ll need to search with an exact address.)
The income threshold is defined as no more than 115% of area median household income. In other words, your household income can’t exceed the area median income by more than 15%.
Buyers can finance 100% of a home purchase, get access to better-than-average mortgage rates, and pay a lower mortgage insurance rate.
That means no down payment, but borrowers still might want to look into down payment assistance programs that also may help with closing costs.
A USDA loan can be used to purchase, renovate, or build a primary single-family home (no duplexes).
Single Family Housing Direct Home Loans
These subsidized loans, issued directly by the USDA, are available for homes in certain rural areas and for applicants with low and very low incomes.
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.
Adjusted income must be at or below what’s required for the geographical area where the house is located, and applicants must currently be without housing that’s considered safe, sanitary, and decent.
In addition, they must be unable to qualify for loans elsewhere; 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 borrowers who have more assets than are allowed 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 repayment term can be up to 33 years, or 38 years for applicants with very low income.
Funds can be used to purchase, build, repair, or renovate a single-family home. 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.
Apply directly with your state Rural Development office .
This online eligibility tool can help potential borrowers see if they might qualify.
Single Family Housing Repair Loans and Grants
This program, also called the Section 504 Home Repair Program, is for homeowners with very low incomes who need a loan to improve, repair, or modernize their homes.
The program also offers grants if the applicants are 62 or older with very low incomes and if the money will be used to remove hazards to health and safety. The borrower must own the home and live in it. Income must be less than 50% of the area median income, and homeowners must not be able to find affordable credit through other venues.
Limits on both the loans and the grants are 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 details about how to apply, applicants may contact their state Rural Development office.
Homeowners of higher income levels who need to finance home repairs may want to look into home improvement loans.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Pros and Cons of USDA Loans
This section will focus on the USDA guaranteed loan program.
USDA Loans Pros
• Typically no down payment is required.
• Lower rates than FHA and conventional loans on average.
• There isn’t a minimum FICO® score to qualify, so a less-than-ideal credit history may not prevent the loan from going through, though lenders like to see a credit score of at least 640 and a debt-to-income ratio of 41% or under.
• The guarantee fee of 1% of the loan amount can be rolled into the loan if it would be too difficult for the borrower to pay it out of pocket.
USDA Loans Cons
• Homes must be in eligible rural areas.
• Applicants must meet income limits.
• Only certain lenders offer the program.
• USDA loans require a 1% upfront guarantee fee and a 0.35% annual guarantee fee, based on the remaining principal balance each year.
Other Types of Mortgage Loans
In general, if your household income is more than 115% of the area median income, you 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. That’s just one reason you might need to seek another type of 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 3% to 20%, and the lender will look at the debt-to-income ratio and credit scores when deciding whether to grant the mortgage loan.
FHA loans: Lenders that issue these loans are insured by the Federal Housing Administration, and it can be easier to qualify for this type of loan than a conventional mortgage. Lending standards can be more flexible and, with a credit score of 580 or higher, the borrower might qualify for a down payment of 3.5%. Note that mortgage insurance for an FHA loan can be high.
VA loans: Veterans, active military members, and some surviving spouses may receive VA loans provided by banks and other lenders but guaranteed by the VA. Eligible borrowers can benefit from a loan with no down payment and no monthly mortgage insurance. Most borrowers will pay a one-time funding fee, though.
Different types of mortgage loans have benefits and disadvantages. As a homebuyer it is beneficial to understand what is applicable to your situation.
First-Time Homebuyer Programs
Borrowers who qualify as first-time homebuyers can receive benefits. Loan programs 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.
• SoFi mortgages for qualifying first-time buyers, who can put just 3% down.
It can make sense for low- and moderate-income borrowers to contact their state housing agency to see what programs are available for first-time homebuyers.
Recommended: Find First Time Home Buyer Programs in Your State
The Takeaway
USDA loans support rural homebuyers and homeowners who meet income limits. Others shopping for a mortgage will need to research home loans and find a choice they can live with.
Whether you’re putting down stakes in the country, city, or ’burbs, SoFi might just have a mortgage for you. Get prequalified for a mortgage in just a few clicks.
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