The USDA Section 502 Direct Rural Housing Loan Program offers financing strictly to those borrowers that have low income. These borrowers must purchase a home located within a rural area, as determined by the USDA. The Direct Loan Program can be used to build a home or purchase an existing home as long as it is considered moderate housing.
Qualifying for the USDA Section 502 Direct Program
There are strict requirements to qualify for the USDA Section 502 Direct Program since it offers such great assistance for low income borrowers. To start, your total household income must be considered very low or low. This is defined as follows:
- Very low income is income that is 50 percent less than the average median income for the area
- Low income is income that is between 50 and 80 percent of the average median income for the area
In addition to these requirements, you must be without safe and sanitary housing. You also have to be able to prove that you can afford the new mortgage, as would be the case for any type of financing.
Loan Terms
The loan terms for the USDA Direct Program are a little more lenient than any other program in an effort to make the payments the most affordable for low-income families. The term for the loan can extend up to 33 years, which is 3 years longer than the typical mortgage term. If you are in a circumstance where you cannot afford the 33-year term and have income that is below 60 percent of the average median income for your area, you can stretch the term up to 38 years.
Determining the Payment
The payment for the Direct Loan is determined by the higher of two factors:
- 24 percent of your adjusted annual income
- 1 percent of the principal and interest of the loan plus the real estate taxes and homeowner’s insurance costs
Property Restrictions
There are certain property restrictions that must be followed in order to determine the eligibility for the USDA Direct Loan. These include:
- A modest home for the area based on its cost
- No more than 2,000 square feet in size
- In-ground swimming pools are not allowed
- The home must not be used to produce an income
In addition, as with any USDA loan, the property must reside within the USDA boundaries, which can be found here.
How Large of a Loan can you Get?
Every borrower will have their own loan limits based on their qualifying factors. Just as is the case with any other type of financing, your income will help to determine what you can afford. The lender will look at your income, assets, and liabilities to determine what you can afford. No matter what your income qualifies you for, though, you can never exceed the Loan Limits for the Area.
If you do not have a large amount of assets, chances are you can receive 100% financing on the home you wish to purchase. In certain cases, however, if there are too many assets available, the USDA and the lender may require you to use a portion of the assets as a down payment although this is rare.
The USDA 502 Direct Rural Housing Program makes it easy to secure safe and sanitary housing when conventional financing is not an option for you. Even though you do not qualify for conforming financing, you must have decent credit in order to qualify since the USDA is guaranteeing the loan for the lender. If you fall within the income guidelines for your area; find a home within the rural boundaries; and meet the qualifying factors for the loan, you should be able to secure flexible and affordable financing for your home.
