The RD Home Loan or the USDA Rural Development Loan offers a loan program for borrowers with low income and little to no money to put down on a home. The USDA loan provides borrowers with up to 100% financing, low costs, and payments low-income families can afford.
The USDA sets the guidelines for the RD home loan, but individual lenders write the loans. You’ll go through a USDA-approved lender to get the loan, but the USDA has the final say in the approval. Once approved, the lender closes and funds the loan for you.
Are you ready to learn more about the RD Home Loan? Check it out below.
Eligibility for the USDA Home Loan
First, you must be eligible for the USDA home loan. Eligibility is different than qualifying for the home loan. Eligibility means that you meet the following:
- You buy or refinance a USDA rural property
- You make less than the maximum income allowed for your area
Keep in mind that the USDA considers your total household income when determining your eligibility income. Your total household income includes money that anyone in your household makes whether it’s a child over the age of 18 or a parent or grandparent that lives with you.
The USDA does provide allowances for certain situations in your home which lowers your income, making it easier to meet the eligibility requirements:
- $480 for every child under the age of 18
- $480 for every child over the age of 18 that is a full-time student
- $480 for every disabled person that lives with you
- $400 for every elderly person that lives with you
Qualifying for the USDA Loan
Once you know that you’re eligible for the USDA loan, you must then prove that you qualify for it. This means proving the following:
- You have at least a 640 credit score
- You have a housing ratio no higher than 29%
- You have a total debt ratio no higher than 41%
- You have stable income and employment
- You will live in the home as your primary residence
One benefit of the USDA loan is the lack of down payment needed. You can buy the home with 100% financing, which helps lower the money you need to bring to the closing. This helps many low-income families afford a home without needing a lot of money upfront.
The USDA Mortgage Insurance
As you calculate your debt ratio to see if you qualify for a USDA loan, keep in mind that you’ll pay mortgage insurance for the life of the loan. The USDA charges two types of mortgage insurance:
- Upfront mortgage insurance – You pay this insurance one time at the closing. The USDA charges 1% of your loan amount for this charge. If you have a $100,000 loan, that means $1,000 in upfront MIP.
- Annual mortgage insurance – This is the charge that figures into your debt ratio because you pay it every month. The annual mortgage insurance charge is 0.35% of your loan amount. On a $100,000 loan, you’d pay $350 per year or $29 per month.
You pay mortgage insurance the entire time you have a USDA loan. This is unlike the conventional loan, which allows you to cancel your mortgage insurance once you owe less than 80% of the home’s value. If you want to eliminate the mortgage insurance you pay on your USDA loan, you’d have to refinance into a conventional loan once you owe less than 80% of the home’s value.
The Rural Property Guidelines
One thing worth mentioning again is the need for the home to be ‘rural.’ The USDA has unique guidelines regarding what rural means. In general, it means an area with low population and low economic stimulation. The USDA provides loans in these areas to help stimulate the area. The more homes sold in the area, the more the area will grow. The USDA’s definition of rural doesn’t mean living in the middle of cornfields or far away from city life.
The RD Home Loan is a great way to get into a home when you have low income and no money to put down on a home. If you are eligible for the loan program, it offers low fees and an affordable way to become a homeowner faster than you thought.