The U.S. Department of Agriculture has a program designed to encourage people to purchase and renovate homes located in rural areas. The program is called the USDA Rural Development program, and it’s designed to provide low- to moderate-income households with units that are decent, safe and sanitary.
The Rural Development program can help eligible buyers purchase a home with no money down or less-than-perfect credit.
What Is a USDA Loan?
The USDA program guarantees mortgages, which can be obtained through approved lenders. The USDA doesn’t actually loan money under the loan guarantee program, but it does make it easier for lenders to loan you the money you need. USDA loan rates are set by lenders and are usually very competitive with rates on other mortgage loans, but you will pay an upfront guarantee fee of 1 percent of the loan amount plus an annual 0.35 percent fee.
The USDA guarantees 90 percent of the loan, so the lender can loan you 100 percent of the purchase price of the home with very little risk. A USDA loan is the only common loan option with no down payment — unless you’re a veteran and qualify for a VA loan.
USDA Loan Requirements
You must meet USDA income eligibility requirements to qualify for a USDA home loan. The guidelines are based on the size of your household and the area in which you want to purchase a home.
Your income must be within 115 percent of the median income in the area. For most areas, the maximum income level to qualify is $78,200 for a household with one to four people. The maximum income can be as high as $202,250 for one to four people in some high-cost areas like the San Francisco metro area.
USDA loan credit requirements are modest, requiring a credit score of at least 640 to be approved using the lender’s automated approval system. Borrowers with credit scores below 640 must have their applications processed manually. The USDA doesn’t set a minimum credit score for Rural Development loans, but lenders typically do.
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You must agree to live in the home as your primary residence. In addition, you can’t get a USDA mortgage on a home if you’re planning to rent it out to someone else.
USDA property eligibility requirements determine whether a home qualifies for a Rural Development loan. You can use the funds to purchase a new or existing home to use as your primary residence. You can also borrow the money needed to make necessary repairs or install items like insulation, solar panels or double-paned glass to improve energy efficiency.
The USDA website has a Rural Development section where you can learn more about income limits. The site also has maps showing eligible areas, plus a list of approved lenders and contact information for local guaranteed-loan specialists who can answer your questions.
Prospective borrowers who meet USDA loan eligibility requirements can get pre-qualified by the lender. The pre-qualification gives you a good idea of the amount you can spend on a home, assuming the information you have provided about your income, employment and credit history checks out.
Finding a Property
The next step is to find a property that meets the program’s eligibility requirements. You can look up specific addresses on the USDA website to determine whether they’re in eligible areas.
Buying Your Home
The rest of the process works much like any other home purchase. You make an offer on the home you want, and the seller will either accept or decline your offer or make a counteroffer. Once your offer is accepted, you’ll make your earnest money deposit and apply for your loan.
The Application Process
Get the ball rolling on your loan by finding lenders that offer USDA financing. Compare rates and loan terms to find the best value for your situation.
The application process is essentially the same as applying for any other mortgage. You’ll need to document your income, credit history and employment and demonstrate your willingness and ability to meet your credit obligations.
Closing the Sale
The lender will start processing the loan as soon as you’ve submitted a complete application. Once the lender and the USDA have signed off on the loan, you’ll schedule your settlement to complete the transaction. You’ll sign all the final documents for the sale and the loan on that day, and you’ll leave the settlement with the keys to your new home.
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