Introduction

For many individuals and families dreaming of homeownership, financial barriers such as down payments and strict credit requirements bring a hard stop to their dreams. Fortunately, the United States Department of Agriculture (USDA) offers a solution through its achievable loan programs. USDA loans are designed to promote homeownership in rural and suburban areas, their mission is to build communities by providing affordable options for those who might otherwise struggle to secure financing. 

USDA aims to foster stability in rural communities by making housing possible. The USDA has more than 70 programs to support Rural communities, from water conservation to commercial investment programs to community housing. 

By offering no down payment options, extremely competitive interest rates, and flexible credit score criteria, these loans make it possible for more people to achieve the dream of homeownership. This blog provides a comprehensive guide to USDA loans, helping you determine if this option is right for you and your family. We’ll cover the property and borrower eligibility requirements, debunk some myths, and the application process. Whether you're a first-time homebuyer or exploring financing alternatives, understanding USDA loans will empower you to make an informed decision and bring you one step closer to owning your dream home.

 

USDA Loan Programs

USDA loans open the door to homeownership for many who may not qualify for conventional financing by providing two basic programs: 

 - Single-Family Housing Direct Home Loans

 - Single-Family Housing Guaranteed Loans

The Single-Family Housing Direct and Single-Family Housing Guaranteed programs provide options for low- and moderate-income borrowers to purchase primary residences. Eligible applicants may purchase, build, rehab, or relocate a dwelling in an eligible rural area with 100% financing. For these programs, they must not exceed 115% of median household income. This is a percentage of the average household income in the area. For example, in Arizona, Payson the median household income for the Guaranteed loan is $112,500, and the median household income for Direct is $56,000. If an applicant makes $78,000, they do not qualify for the Direct loan, but they do qualify for the Guaranteed loan. 

 

Homeowner Assistance Fund

Due to challenges rural communities faced during the COVID-19 pandemic, the USDA offers a fund designed to help families displaced from their homes, or other mortgage issues like delinquencies, defaults, or foreclosures. There may still be money available for tribal members or different families, depending on the state. 

Loan Purpose

USDA loans are designed to encourage homeownership by enabling borrowers to purchase or build their primary residence—vacation homes and investment properties are not eligible. Eligible properties include single-family homes, new construction, mobile or manufactured homes, and certain condominiums. However, there are some restrictions:

- Properties cannot be used for income-generating purposes, such as farming or operating a business.

- The home must be "modest in size"—typically under 2,000 square feet—and cannot include features like an underground pool.

- There are no restrictions on the size of the parcel of land.

 

Eligibility Requirements for USDA Loans

Understanding the eligibility criteria is crucial to determine whether you or a property you’re interested in qualifies. Here are the key requirements:

Map and Property Eligibility

USDA focuses on rural land, but “rural” doesn’t always mean remote farmland. The USDA’s definition includes many suburban areas that meet specific population and development thresholds. Start with the property or area you are interested in buying. To determine if a property qualifies, the USDA provides an online property eligibility map. By entering the property address, you can quickly see if the location is within an eligible area. What is considered rural? Usually, small communities that have 35,000 people or less qualify. 

Borrower Requirements

Once you find an eligible area, a borrower must meet specific financial and legal criteria:

Income Limits: After you check the property eligibility, you need to check that area’s income limits, as USDA loans are intended for low- to moderate-income households. Income limits are adjusted based on family size, gross income, and any deductions used in child care. The USDA offers this income eligibility calculator on their website to help applicants determine whether they fall within the required range for that specific county/property.

Citizenship and Legal Residency: Borrowers must be U.S. citizens, U.S. non-citizen nationals, or Qualified Alien. 

Credit Score and History: While the USDA does not set a minimum credit score requirement, most investors prefer a score of at least 640 for the best rates and terms.USDA, like all other government entities, looks at each loan file and level of risk. Borrowers with lower scores may still qualify but may need to meet additional requirements, such as providing a more extensive credit history or a lower debt-to-income ratio. No credit score is allowed, but alternate tradelines are required. 

DTI: A Debt-to-Income (DTI) ratio measures the percentage of your monthly income that goes toward paying debts and helps determine your ability to consistently make mortgage payments without missing any. USDA loans offer a more lenient DTI requirement, allowing up to 50%. Debts included in this calculation typically consist of student loans, credit card payments, and car loans.

 

Key Benefits of USDA Loans

USDA loans offer numerous advantages that make homeownership more accessible and affordable for eligible borrowers. Below are some of the key benefits:

No Down Payment Requirement

One of the most significant advantages of USDA loans is that no down payment is required. This feature allows buyers to finance 100% of the home’s purchase price, removing a major barrier to entry for many prospective homeowners. Keep in mind that if you do put some money down, you will get more favorable interest rates and other terms. 

Fixed Interest Rates and Fixed Terms

USDA loans often come with lower interest rates, ranging from 1-3% of the loan amount. These are extremely low, compared to conventional mortgages. These low rates are made possible by the government’s backing, which reduces the risk for lenders and enables them to pass on the savings to borrowers. 

Only 30-year fixed loans are offered, and no ARMS is allowed. 

Flexible Credit Requirements

Borrowers with less-than-perfect credit can still qualify for USDA loans. While specific credit score requirements vary by lender, USDA loans typically offer more flexibility, making them accessible to a broader range of applicants.

Guarantee Fee

USDA has something called a guarantee fee. This fee has two parts. The first is a one-time, upfront payment of 1% of the loan amount. This is usually financed into the loan amount; however, if you pay it upfront, your overall interest paid will be lower. There is an annual fee, of .35% of the loan amount, divided into monthly payments. 

Closing Costs

USDA has one of the lowest closing costs fees and is one of the only loans that allows you to roll your closing costs into the loan amount. You can also negotiate seller concessions up to 6%, and this money can pay closing costs instead of going into the loan amount. With no down payment and no closing costs upfront, borrowers can get into their homes more easily than other loan programs. 

Meet USDA Lender Appraisal Standards

Before a USDA loan can be approved, the property must undergo an appraisal. This appraisal helps determine the home’s market value and ensures it meets the USDA’s minimum property requirements. During the process, the appraiser typically:

 - Verifies that the home complies with building codes

 - Confirms the home’s square footage

 - Check the number of bedrooms and bathrooms

 - Ensures there are no income-generating structures

This is important because the property has certain standards that they will loan on, with the property reaching typical standards as well as the ‘modest standard’ stated above. 

 

How to Apply for a USDA Loan

Applying for a USDA loan may seem daunting, but the process is straightforward when broken into manageable steps. Here's a step-by-step guide to help you navigate the process efficiently:

Steps in the Application Process

1. Check Property and Borrower Eligibility

 Begin by confirming the property is located in a USDA-eligible rural or suburban area. You can use the USDA’s online property eligibility tool on your own time to determine whether the location qualifies. It's important to not get set on a property before you know if you qualify or not. 

 

2. Find an Approved Lender

For USDA Guaranteed Loans, work with a USDA-approved lender. Not every lender services these loans, but you can rest assured that X2 services any loan for every type of borrower. 

 

3. Complete the Application

Once you’ve selected a lender, you’ll begin the application process. Be prepared to fill out forms detailing your financial situation, personal information, employment history, and the property you intend to purchase or build.

 

Documents Needed

To streamline your application, gather the following documents:

 - Proof of Income: Recent pay stubs, W-2s, tax returns, and your driver's license. These can be uploaded on the application.

 - Credit History: You can find your credit score through your bank or on an app, like Credit Karma. Be ready to provide proof of alternate credit lines if you have a limited traditional credit history.

- Property Details: If you haven't met with a real estate agent, this might be a good time. This way you can start to look at properties that you can afford and give these numbers to your broker to see what payment quotes you can have. 

Timeline Expectations

The time it takes to process a USDA loan varies but typically ranges from 30 to 60 days. Factors like appraisal completion, underwriting, and document verification can affect this timeline. Working closely with your lender and promptly providing required documentation can help expedite the process.

Common Myths About USDA Loans

Several misconceptions about USDA loans can deter potential borrowers. Let’s debunk some common myths:

Myth: Only farms are eligible.

USDA loans are not limited to farms, farmers, or agricultural properties. They are intended for everyone, as long as they meet other eligibility requirements. 

Myth: USDA loans are only for very low-income families.

While USDA loans are designed to assist low- to moderate-income households, income limits are adjusted for family size and location. Many middle-income families qualify.

Myth: The process is too complicated.

Applying for a USDA loan is no more complex than applying for other types of mortgages. With the right guidance from your lender, the process is straightforward. Many lenders don’t service USDA loans, but rest assured, X2 Mortgage does!

Myth: You can live in a metropolitan area and buy a USDA loan in a qualifying area for a vacation home. 

You can't buy a secondary residence, investment, or vacation home, with a USDA loan. Additionally, you cannot live in the city with a conventional loan on your property, sell that, and then go buy a USDA loan without a change of income circumstance. You still have to meet the 115% of the median household income of the area. 

Myth: USDA loans are for first-time home buyers. 

If you have to move, as long as you find a home in a qualified area, you can get another USDA loan. 

Myth: I can get cash back when I refinance my USDA loan.

 USDA loans do not allow cash-out refinancing, unlike other mortgage programs. USDA does offer refinance programs, including Streamline Refinances, but you cannot access your equity. To do this, you may need to refinance into a Conventional or FHA loan. If you have at least a 620 credit score and 80% LTV for FHA and conventional loans, you can apply. However, with FHA loans you will have higher upfront and annual mortgage insurance premiums than USDA loans, so working with a broker will help you get the numbers to make sense before making any moves. 

 

Conclusion

USDA loans are a game-changer for individuals and families aspiring to achieve homeownership, particularly in rural areas. With no down payment requirements, competitive interest rates, and flexible eligibility criteria, these loans provide a unique opportunity to break through financial barriers and build a stable future. By focusing on fostering community growth, USDA loans remain an invaluable resource for low- to moderate-income households.

Whether you’re a first-time buyer or seeking a more affordable financing option, USDA loans offer an accessible path to your dream home. However, navigating the eligibility requirements and application process can be complex, which is why consulting with a knowledgeable mortgage professional is essential.

Take the next step toward homeownership today—explore USDA loans and discover how they can make your dream of owning a home a reality. Reach out to us to determine your eligibility and unlock the benefits of this exceptional program.