6 minute read
June 1, 2022

Here’s How to Apply for a USDA Home Loan

Here’s How to Apply for a USDA Home Loan
6 minute read
·
June 1, 2022

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If you’ve heard about USDA home loans but have some questions, keep reading. 

In this post, we’ll look at how to apply for a U.S. Department of Agriculture home loan, the minimum requirements, what makes a property eligible, and why pre-approval is so important for homeownership.

What are USDA home loans?

The USDA single-family housing guaranteed loan program offers zero-down-payment mortgage options for homebuyers in some rural regions. 

USDA home loans are aimed at helping borrowers who may have a lower income or can’t qualify for a conventional loan to buy a home.

USDA home loans are issued through the United States Department of Agriculture, sometimes called the “USDA Rural Development Guaranteed Housing Loan Program.”

As part of the USDA’s Rural Development program, it strives to improve the “economy and quality of life” in the rural united states through its low-interest rate, no down payment mortgage program.

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In what ZIP code are you thinking of buying?

About the USDA Loan Process

Under the USDA home loan programs, there are three options available to interested borrowers: 

  • Direct loans
  • Loan guarantees
  • Home improvement grants and loans

Let’s look at each one in detail.

Direct loans are home loans issued by the USDA. These new home loans offer interest rates as low as 1% (when modified by payment assistance) for moderate-income, low- and very low-income borrowers.

The USDA offers loan guarantees, backing mortgages similar to FHA loans or VA loans. By backing or “guaranteeing” home loans, the USDA helps reduce the risk for lenders and helps borrowers access lower mortgage interest rates—without a down payment.

With its home improvement grants and loan programs, the USDA offers direct loans or financial awards to homeowners looking to upgrade or otherwise make repairs to their homes. 

Borrowers can receive both a home loan and a grant simultaneously. 

Private mortgage insurance on USDA home loans?

With a USDA loan, borrowers must pay mortgage insurance (MI). 

USDA loans require both upfront—usually, 1% off the total loan amount, added to the loan balance as part of the closing costs—and an annual mortgage insurance fee of 0.35% paid in 12 equal installments, often included with the monthly payments. 

Additionally, borrowers who opt for the no-down payment route must pay a mortgage insurance premium.

How do I qualify for a USDA home loan guarantee?

Borrowers must be below preset USDA has income limits to qualify for a guaranteed home loan. Income limits vary depending on the household size as well as location. 

To find out if you qualify, refer to the USDA’s income limit map. 

USDA guaranteed home loans eligibility requirements include:

  1. Only single-family homes that are owner-occupied can qualify for USDA guaranteed home loans. 
  2. Applications must be a U.S. citizen, or if a non-citizen, must have U.S. permanent residency.
  3. The USGA typically requires that monthly debt payments must not be more than 41% of your income. However, the USDA will consider borrowers with credit scores above 680, even if their debt-to-income ratio is above 41%.
  4. Borrowers must have proof of a reliable monthly income, most often for the two years immediately preceding their loan application.

The USDA also offers a streamlined application process for borrowers with credit scores above 640. 

USDA-issued home loans 

In an attempt to assist those experiencing the most immediate housing needs, the USDA issues direct mortgages for individuals or families that:

  • are without “decent, safe and sanitary housing.”
  • are unable to qualify for a traditional home loan from conventional mortgage sources, i.e., banks, mortgage brokers
  • have an adjusted household income that meets is or below the USDA low-income limit for their area

USDA direct loans are usually for homes no more than 2,000 square feet with a market value less than the preset USDA loan limit for the area. 

USDA limits can vary significantly depending on where you live. 

For example, USDA home loans in tight real estate markets like Hawai’i can top $500,000 or just over $100,000 for rural areas mainland United States.

Find a Home in a USDA-Eligible Area

While there can be exceptions, USDA loans generally exclude urban or metropolitan areas. However, some specific suburban areas can be found.

In addition, the USDA considers all rural locations eligible for consideration. 

To find out if your property meets the USDA property eligibility requirements or explore what eligible rural areas approved, refer to the USDA Eligibility Map.

Get pre-approved

USDA guaranteed fixed-rate mortgages are offered through mainstream mortgage lenders, like Assist Home Loans, allowing you to apply in person, online, or over the phone.

Because these loans aren’t issued directly through the USDA, borrowers are still required to get pre-approved. Borrowers must also meet USDA income eligibility, debt, credit history, and other loan requirements.

Not only does pre-approval help you know how much you’re eligible to receive, but it also helps sellers know you’re serious about the transaction.

In a competitive real estate market, pre-approval can sometimes make the difference between a seller accepting your offer or accepting an offer from another pre-approved party.

Because lenders must then forward the loan applicator to the USDA for approval before they can begin underwriting, it can add upward of two to three weeks to the overall mortgage application processing time.

Underwriting loan approval

Underwriting loan approval is the process lenders use to determine whether to offer a borrower credit and, if so, how much. 

Lenders and loan programs each have minimum requirements that borrowers must meet to be eligible to receive a home loan.

Every loan offered is a risk the lender must take, and underwriting is the way lenders help minimize the risk by assessing how likely a borrower will be to repay on time and for the full loan term.

USDA home loan—first-time homebuyers only?

The USDA loan program is available for both first-time buyers, and repeat homebuyers, provided the property will be your primary residence. 

However, USDA loans are not available for vacation properties, investment properties, or working farms.

Get in touch with Assist Home Loans to guide you through pre-approval 

To find a USDA-approved lender, like Assist Home Loans, check lender websites or refer to the USDA-approved lenders’ list from the USDA website.

If you’re considering buying a rural property and are curious whether it qualifies for a USDA Rural Development loan, contact Assist Home Loan today.

We’re here to answer all your questions about USDA loans. We also specialize in many other government-backed loans like FHA or VA loans and their refiancing options

Ask about any aspect of the mortgage, mortgage payments, home buying or refinance process, and let’s get you into your new home.

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