USDA Loan

What is a USDA Loan?

The USDA Loan is a type of mortgage loan that is offered to villagers to buy a home for the first time. The U.S. Department of Agriculture guarantees that if the borrower fails to repay the loan, they will protect the lender.

USDA loan is given to those who are trying to buy a house for the first time but are not getting a conventional loan. USDA Loan does not require any down payment. This initiative has been taken to provide loans to those who have a low credit score.

To get a USDA Loan, you must be in a USDA approved area and cannot exceed the income limit.

How Does USDA Loan Programs Work

USDA loans are more attractive than FHA loans because of lower down payments and annual fees. There are three options of USDA loan.

Direct loans: These loans are issued by USDA to those whose income is very low. The government subsidizes these loans. You can get a loan at as low as 1% interest.

Loan guarantees: These loans are arranged to help lower and lower-middle class home buyers. Local private mortgage companies offer these loans at low interest rates and USDA guarantees them through its Single Family Housing Guaranteed Program.

Home improvement loans and grants: This loan is granted for home repair or upgrade. This loan package with grant is offered up to $27,500.

USDA Loan Requirements

Residency

To be eligible for a USDA Loan, the borrower must be a U.S. citizen or a permanent resident with a green card.

Location of residence

The borrower must be in a USDA approved village or suburb. So if you want to apply for this loan, then you need to mention the home address. One thing to keep in mind, select the Single Family Housing Guaranteed option when applying.

Borrower’s income

The annual income limit is $90,300 for one to four person households and $119,200 for five to eight person households. You can check the maximum income limit based on the home size and county.

To be eligible for a USDA loan, your income must be within the limits set by the USDA. Your gross income cannot exceed 115% of the median income in your area.

You must have a sustainable source of income and with your assets, savings and current income; it has to be possible to make at least 12 months mortgage payment without incident.

Your debt-to-income (DTI) ratio should be 50% or less. Lenders give importance on it. How to calculate DIT? Divide all your outstanding debts by current gross monthly income and you will get DTI.

Credit Score

Most lenders ask for a credit score of 640 or higher for a USDA loan. However, if a borrower has a lower credit score, he can also be eligible for USDA loan. In this case, borrower has to negotiate with the lender and accept the terms given by the lender.

Those who do not have a credit score or have a limited credit history can also qualify for this loan through nontraditional credit references such as rental, utility payment history, etc.

Pros and Cons of USDA Loans

As you know, USDA loans are offered to rural and suburban residents. The terms of this loan are very tender due to which low income people can easily get this loan. However, before taking any loan, one should know about the pros and cons of that loan. The pros and cons of USDA loans are as follows:

Pros

  • A big advantage of USDA loans is that no down payment is required.
  • Even if you have a low credit score, you will be considered for a USDA loan. You may get this loan even if you do not have a credit history.
  • USDA loans can be used for both property purchase and refinancing.
  • You can get this loan at low interest.

Cons

  • Your income must be within the income limit set by the USDA. If your income exceeds, you will not be considered.
  • This loan can only be used to buy a home for the first time. You cannot use it to purchase more than one home.
  • Since there is no down payment, you have to pay mortgage insurance every month.
  • You have to follow some strict rules of the lender if you have low credit score.

What are the Interest Rates and Terms of this Loan?

The interest rate on USDA loans is fixed which is determined based on the current market rate. Based on the current market rate, it will be from 1 percent to a maximum of 3.75 percent. But there is no guarantee that this rate will always be the same. Different lenders may charge different rates.

If your income is very low, you can get a USDA loan at 1 percent interest. But if your income is between very low income and low income, then your interest rate can be 1.5 to 3.75 percent.

In the case of Direct Program, the term of the loan is 33 years, but if one cannot afford to repay the loan within this period, then the option of 38 years is also available. For guaranteed programs, the loan term is 30 years and the loan interest is currently 4.25 to 6 percent in the market.

USDA mortgages come with two types of fees, an upfront guarantee fee and an annual fee. The upfront guarantee fee is 1 percent of the total loan. This fee can be rolled into a mortgage without paying from your own pocket. On the other hand, according to the current market, the annual fee is .35 percent of the total loan. For example, if you borrow $200,000, you will have to pay $2,000 as one-time payment and pay $700 every year, which will last until the loan term expires.

There are some costs that may include in your loan cost, such as loan application fee, origination fees, processing or underwriting fees, credit report and notary fees etc.

How to Get a USDA Loan

You must meet all the conditions discussed above before taking a USDA loan. If you can meet these conditions then you can consider borrowing.

Before you seek for a USDA loan, you have to decide whether you want a direct loan or a guaranteed loan.

If you decide to take a direct loan, you need to contact the USDA Rural Development office. You have to inform them about your financial situation. You can ask them if you have any query about this loan. You will have to follow the instructions given by the representative of that office and apply for loan.

If you want to take out a guaranteed loan, you need to apply to USDA approved lenders. However, you may not find all approved lenders in the list mentioned here. You need to contact the lender from whom you want to borrow money and apply for the loan. Here is a tip for you. You can contact a few lenders then analyze their terms, fees, closing costs, etc. You can apply for a loan from the lender that will give you the most benefits.