USDA Loans: A Comprehensive Guide
For homebuyers seeking an affordable path to homeownership, USDA loans are a great opportunity to look into. In this guide, we will break down everything you need to know about USDA loans. From eligibility requirements to the application process, we’ll cover it all so you can help determine if this is the right loan type for you.
USDA loans are a popular choice because they require 0% down, and are a true 100% financing option. You are always welcome to contact us for more personalized guidance on your home loan options!
What are USDA loans?
USDA loans are backed by the United States Department of Agriculture, and are designed to help borrowers purchase homes in eligible rural and suburban areas. The goal is to help economic growth and stability in these eligible areas by providing a 0% down payment option.
USDA loans also offer competitive interest rates and can sometimes be more flexible with credit - which may make them an option for borrowers who may not qualify for conventional financing.
Types of USDA Loans
As with many other types of loans we’ve talked about, there are different types of USDA loans!
The different types of USDA loans are:
Purchase
Rehabilitation Purchase
Standard Refinance
Streamline Refinance
USDA Direct Loans - note: USDA Direct loans are handled by the Department of Agriculture directly.
There are no USDA construction loans.
USDA Loan Requirements
There are two main items that are scrutinized when qualifying for a USDA loan:
The geographical location of the subject property
The total household income for the borrower(s)
USDA Loan Map
The geographical location is one of the main factors in determining if a USDA loan is possible. Anyone can check if a property is in an eligible area on this website.
USDA Loans Eligibility
When shopping for loans, keep in mind that your financial situation is unique, and there is not a one size fits all solution. Our loan officers are here and ready to help you find the right loan to fit your needs, whether it be a USDA loan or something else!
Credit Requirements for USDA Loans
Borrowers need to get pre-approved for a USDA loan just like any other loan. While USDA loans themselves do not officially have a minimum credit score, most lenders require a 620 minimum middle credit score.
One of the benefits of working with a Mortgage Broker is that we are able to shop around many different lenders to find the best loan product tailored to your specific financial situation.
Why Would You Get Denied for a USDA Loan?
USDA loans limit your Debt to Income to 41%, and will occasionally allow for slightly higher with positive contributing factors. This has a great impact on the amount of borrowers that get approved for a USDA loan.
Debt to Income ratio, commonly referred to as DTI, is a metric that lenders use to assess a borrower’s ability to make monthly payments. DTI represents the amount of someone’s monthly income that goes toward paying debts (car loans, credit cards, mortgage, and other financial obligations). A higher ratio is an indication of higher risk to lenders.
If you are interested in a USDA loan, it’s important to talk to a loan officer to make sure this is the best loan for your needs. Reach out today to get connected with a loan officer near you that can help!
What Are the Pros and Cons of a USDA Loan?
With anything, there are pros and cons. While many people like the opportunity to own a home with 0% down, the restrictions on eligible areas and income can often make it tricky to qualify. However, if the property and borrower are both eligible for this loan, it’s a great option.
Pros:
0% down payment
Low monthly mortgage insurance
Allow for credit scores under 600
Cons:
The program is only available in certain areas
There are restrictions on the total household income allowed to qualify
Frequently Asked Questions About USDA Loans
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There is no minimum down payment required for a USDA loan, because this is a true 100% finance loan option.
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You can check if a property is in an eligible area by visiting this link.
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USDA loans themselves do not have specific credit requirements, and those are set by the individual lenders. Most lenders we’ve seen have a minimum credit score of 620.
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Yes, you can purchase a home that has been foreclosed on with a USDA loan. However, it has to meet the minimum condition requirements that USDA has set in place. A loan officer can give you more information on those requirements.
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The standard waiting period for a USDA loan is 3 years from the date of a bankruptcy discharge. 12 months or more can be possible with extenuating circumstances.
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Yes! These 0% down mortgage loans are a great option for first-time home buyers, provided they are looking at properties in eligible areas and meet other loan requirements.
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No! This is a common misunderstanding about USDA loans. USDA loans are NOT exclusively for first-time home buyers.
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Yes, but the total household income has to be below the program requirements.
Understanding the Value of USDA Loans
USDA loans are designed to promote homeownership in rural and some suburban areas, and offer an excellent path to homeownership for buyers who may not qualify for other financing options.
These government-backed loans provide attractive advantages, including 0% down payment, competitive interest rates, and flexible credit requirements. For many potential buyers, saving for a down payment is one of the biggest obstacles to homeownership that can be overcome with a USDA loan.
USDA loan eligibility is mainly determined by location and income, and properties must be located in an eligible rural or suburban area, as defined by the U.S. Department of Agriculture. The income requirements will vary by region and household size.
And, contrary to what many people think, USDA loans are not exclusive for first-time home buyers. They are great loan options for both first time home buyers and people who have owned homes in the past.
A USDA loan could be the key to achieving your homeownership goals - contact us today to get in touch with a loan officer who can help you determine the best loan product for you!