You decided you prefer non-city life. You found a home situated amongst the trees and open fields that you love. Now you need financing. There are several loan programs you probably could use, depending on your credit, income, and debt ratio. They include conventional and FHA loans. However, there is a great program for government home loans for rural areas – the USDA loan. Qualifying for this loan is simple and it does not require any down payment. It is a perfect situation for those who desire a more serene environment.
What is the USDA Loan?
The United States Department of Agriculture began the USDA or Rural Development Guaranteed Housing Program to help build up areas with less activity. The program helps areas with a certain population by providing low-income families with housing loans. This way they can stimulate the economy and help improve the area. The USDA does not fund the loans. You still must find a USDA approved lender who will approve you for the loan. The lender funds the loan and services it. The USDA provides this lender with a guarantee should you default on the loan. This way the lender knows they will not lose out by providing a 100% loan.
The Types of USDA Loans
There are two types of USDA loans. Which one you qualify for depends on your income. Speaking of income, the USDA looks at your income differently than any other program. They look at the total household income. This includes people not on the loan. Other loan programs, such as the FHA, VA, and conventional loans only count the income from the applicant and co-applicant. The USDA determines your eligibility for the program with your household income. If the income is too high, you may not be eligible for the program. You can see where your income falls here, on the USDA charts. If your income is low or very low compared to the average median income in your area, you may qualify for the USDA Direct Loan. If your total household income is within the average for the area, you may qualify for the USDA Guaranteed Loan.
- USDA Direct Loan – The USDA Direct loan provides borrowers with subsidies that make their mortgage payment more affordable. It is not unheard of to see people with 1% interest rates after the subsidies. Again, these are only for very low income families.
- USDA Guaranteed Loan – This loan has the USDA’s guarantee of repayment to a lender. This is how lenders provide no down payment loans to borrowers. They offer low interest rates, no down payments, and flexible underwriting guidelines.
How to Qualify for Government Home Loans for Rural Areas
Once you know you are eligible based on your income, you must qualify for the loan. This is different than being eligible. Qualifying works much the same as any other loan type. You must provide the lender with:
- Income documents
- Asset verification
- Employment verification
- Personal identifying information
The lender then evaluates these documents. They look at your income’s stability, longevity, and amount. They compare this to your current debts reporting on your credit report. They determine your front-end (mortgage payment ratio) and back-end (total debt ratio). They also look at your credit score, although they do not put a tremendous amount of stress on the actual score. They do want a history free from late payments or collections within the last 12 months.
You must also prove that you do not have any decent housing right now. You also must prove you cannot secure financing from any other source. The home you purchase must also be moderate for the area and not have any luxurious amenities. The USDA loan is meant for those who cannot purchase a home any other way and who need a safe and sanitary place to live.
Finding a Property
One of the key components of the USDA loan is the location of the property. You cannot use it on any property – it must be a rural property. However, you may not realize exactly which homes are in a rural area. The USDA makes it simple, though. Just visit their website and look at your desired area. You can search by specific address or even statewide – you can make it as broad or specific as you like. This makes it easier when you search for an eligible USDA property.
Paying USDA Insurance
As is the case with most government-backed loans, there is mortgage insurance on the USDA loan. You will pay an insurance premium up front as well as annually. You do not have to come up with the cash for the upfront premium, though. You can roll it into your loan amount without affecting your LTV. Right now, the USDA charges 1% of your loan amount up front. On a $150,000 loan, this means $1,500.
In addition to this premium, you will pay annual mortgage insurance. The USDA bills your lender one time per year for the insurance. However, the lender will divide the annual premium by 12 and add it to each of your mortgage payments. This helps keep the premium more affordable. Right now, the annual premium equals 0.35% of your loan amount. On the $150,000 loan, this means $527 per year or $43.75 per month. The annual insurance will change as time passes, though. As time passes and you pay your principal balance down, your mortgage insurance premium decreases. However, you pay this premium for the life of the loan.
If you need government home loans for rural areas, find a lender approved for USDA loans. These loans offer many benefits including no down payment requirements. You will also enjoy low interest rates and simple qualifying requirements. The USDA loan makes it very affordable to purchase a home in a rural area, giving you access to safe and sanitary housing.