If you have the desire to live in a rural area, you may have the good fortune of being eligible for USDA financing. Before you head out and apply with a USDA lender, though, you should know the USDA loan options. They have three mortgage types they offer borrowers. Each program is for a specific type of borrower, though. You will not qualify for all three programs. We break down the programs and how they work below.
The USDA Loan Options
First, let’s look at the USDA loan basics. The program provides 100% financing for borrowers purchasing or refinancing a home in a rural area. The USDA defines rural as an area with fewer than 20,000 people and that is outside the city limits. It does not mean farm fields or homes miles away from any type of civilization.
Any of the three USDA loans do not require a down payment. What they do require, however, is that you meet the income guidelines. This works differently than any other loan. In most cases, the more money you make, the better off your chances of approval. With the USDA loan, it works opposite. The less money you make, the more likely you are to be eligible for the program. However, you still must qualify with the right debt ratio in order to secure the financing.
There is nothing unusual about the USDA loan. You do not have an adjustable rate or a balloon payment. It is basically a program that helps families with low income qualify for home financing. This is the USDA’s effort to provide suitable housing for all families.
USDA Direct Loan
The USDA Direct Loan provides funds directly from the USDA. This differs from most other government-backed programs. In order to qualify for this program, your household income must be between 50 and 80% of the average median income for the area. The Direct Loan offers many opportunities that other USDA loans do not offer including:
- Longer terms, up to 38 years
- Payment subsidies to help make the payment more affordable
- Lower interest rates in order to make the low more affordable, some are as low as 1%
USDA Guaranteed Loan
The USDA Guaranteed Loan is like many other government-backed loans. You must use a USDA approved lender to qualify for this program. The income guidelines still exist for this program, but they are higher. Your total household income can be as much as 115% of the average income for the area.
Because the USDA does not fund these loans, they guarantee them. This means they promise the funding lender repayment of the funds they lose if you default on the loan. In exchange, the lender must follow the USDA guidelines. This means:
- Decent credit history with no foreclosures or bankruptcies within the last few years
- A credit score of at least 620
- Debt ratios that do not exceed 29/41
You cannot have any other housing or be eligible for any other program, including the FHA loan.
USDA Home Improvement Loan
Low income families may be eligible for specific USDA loans or grants to make necessary repairs to a home. The repairs must directly affect the health or safety of the home. The USDA’s goal is to provide safe and sanitary housing for low-income families, which is why the repairs are restricted to those affecting these factors.
In order to qualify, you must be a part of the “low income” families. You cannot make more than 50% off the average income for your area. You also cannot be eligible for any other type of financing. If you are 62 years or older and unable to repay an additional loan to make the changes, you may be eligible for a grant. This money, which can be up to $7,500 will pay for the repairs. In some cases, you may be eligible for both an additional loan amount of $20,000 and the grant, giving you access to $27,500 for repairs. The repairs must directly affect the safety or livability of the home. A few examples include:
- New flooring
- New HVAC units
- Repair/replacement of shingles
Determining Your Income Level
As you can see, the basic premise of the USDA loans is that you must be a low or moderate-income family. The USDA looks at total household income, though. This does not mean just the borrower or co-borrower. It means every adult in your home that brings in money. This income must be figured into your eligibility income. The USDA does allow a few credits for things like children or disabled family members living with you. The credits are as follows:
- $480 for every child under the age of 18
- $480 for every child over the age of 18 that goes to school full-time
- $480 for every disabled person
- $400 for every elderly person over the age of 62
The final figure is your eligibility income. This is not the figure you use to come up with your debt ratio, though. Only the income of the borrower and co-borrower can determine the debt ratio. The USDA offers flexible debt ratios, though, making it easier for low to moderate-income families to qualify.
If you live or plan to live in a rural area, consider USDA financing. With no down payment required and low interest rates available, it can make owning a home very inexpensive. The USDA works to help build up less populated areas in the hopes of boosting the economy in those areas. The USDA rural boundaries change with every census, but for now, you can visit the USDA website to see the available areas near you. It might surprise you to see the number of available areas within the United States. Once you find an area, get in touch with a USDA approved lender and start the process of owning a home.