The United States Department of Agriculture (USDA) offers a residential mortgage loan to qualified individuals who purchase a residential home in designated rural areas. This type of loan is also known as a rural home loan and is available to qualified homebuyers who meet income and housing guidelines. There are 2 main types of loans offered by USDA under this program. These types of loans include: direct and guaranteed. Direct loans are only offered through USDA offices, while guaranteed loans are available through eligible lenders. Both types of loans require borrowers to meet specific income restrictions (see the USDA website for more details). This loan program was designed to help homebuyers purchase owner-occupied properties in eligible rule areas that have low to moderate income. Eligible applicants must be US citizens or qualified alien residents and purchase property that meets all program requirements.
The benefits of this type of mortgage include the following:
• Zero Down Payment – The USDA home loan allows for 100% financing, which means no down payment is required. This is a significant benefit for first-time homebuyers who haven’t had the opportunity to save for a down payment.
• Low interest rates – Although the USDA home mortgage program does not require a down payment, the interest rates offered in this program are often equal to or better than conventional, FHA, or VA financing. Also, the USDA home loan does not have a prepayment penalty.
• Loan Terms – This mortgage program offers fixed-rate loans only. Both 30 and 15 year terms are available.
• Low mortgage insurance rates: The initial mortgage insurance premium for a USDA purchase loan is 2 ½% of the sales price. Monthly mortgage insurance is calculated based on one-half of one percent of the annual principal amount.
• Credit Scores – Homebuyers generally must have at least a 640 median credit score to qualify for a USDA loan. Applicants must also show that they have a steady job and income. Additionally, the maximum debt-to-income ratio normally allowed is 41%. Check with your lender for your actual debt ratio.
This program allows up to 3% of the sale price to be added to the mortgage to pay for closing costs and reasonable out-of-pocket expenses associated with purchasing the property. Although, the mortgage with additional closing costs cannot exceed the appraised amount. If the home’s appraisal isn’t high enough to include closing costs, USDA guidelines allow the seller to pay buyers’ customary closing costs if agreed to in the purchase agreement. An acceptable appraisal must be completed for the property indicating whether the home meets the energy efficiency guidelines required by the USDA. For more information on this type of loan, including eligible areas and income restrictions, contact your local approved lender or your local USDA office.