Who Qualifies for a USDA Loan?

House with a sold signDid you know that the United States Department of Agriculture (USDA) offers home loan financing to qualifying buyers?

Many house buyers believe that they must purchase a rural property to qualify for a USDA loan, but this may not be the case. Indeed, the USDA states that loans are available to homebuyers in areas with less than 35,000 citizens.

USDA loans are available across 97 percent of the continental United States, according to the United States Department of Agriculture. Individuals and families who would not be able to secure a conventional mortgage in their location may take advantage of these USDA loans.

The USDA established the Single Family Housing Guaranteed Loan Program in 1991 to assist rural residents in obtaining a mortgage. Commercial lenders participate in the Single Family Housing Guaranteed Loan Program.

The USDA protects lenders by providing insurance and financial guarantees in the event that a borrower fails on the loan. Due to the default protection, lenders are more willing to lend to borrowers who would not qualify for a conventional mortgage otherwise.

USDA Rural Development Agency is responsible for administering the USDA lending program, generally known as the USDA Rural Development Guaranteed Housing Loan Program.

Types of USDA Loans

USDA provides two lending programs and one loan for home improvement.

Guaranteed Rural Housing Loan under Section 502: This loan program enables low- and moderate-income borrowers to obtain full financing for their house without making a down payment.

USDA Rural Housing Guaranteed Loans are only available on 30-year fixed-rate terms. Applicants must meet the income requirements (and limits), and the house must be situated in a USDA-designated rural area for the guaranteed loan. USDA-guaranteed loans are made accessible through USDA accredited lenders.

Direct Home Loans for Single-Family Housing:

Young couple with their babyDirect loans provide payment assistance to help low-and very-low-income borrowers with mortgage repayment. The residence must be situated in a USDA-designated rural region. Income requirements vary by area.

The loan term may be up to 33 years, with qualifying borrowers having the option of up to 38 years.

The USDA offers a free tool to assist you in determining your eligibility for a direct loan.

Applicants for the Direct Loan Program for Single-Family Housing must fulfill the following requirements:

  • Acknowledge that you will use the property as your principal home.
  • Be exempt from suspension or exclusion from government programs.
  • Being unable to acquire a loan from another source on appropriate terms and circumstances.
  • Do not own an in-ground pool.
  • Meet the conditions for citizenship or eligible non-citizen status.
  • Not be intended for revenue-generating activities.
  • Not exceed the appropriate region loan limit in terms of market value.
  • Possess the legal competence to enter into a loan agreement.
  • Purchase a home 2,000 square feet or less.

Loans and Grants for Very Low-Income Housing Repair (Section 504)

Through the USDA's Housing Repair Program, low-income homeowners may obtain financing to upgrade, repair, or modernize their homes. The repair program's objective is to eliminate safety and health hazards.

Homeowners must earn less than 50% of the area's median income and have trouble finding affordable financing to qualify for a loan.

The grant program is available exclusively to homeowners who are at least 62 years old and unable to repay their USDA Section 504 loan.

To qualify for a rehabilitation loan, the homeowner must lack access to affordable financing and earn less than 50% of the area's median income.

Borrowers must use the Section 504 loan to remodel and repair the house to remove any health or safety hazards.

Terms: Eligible homeowners may apply for grants of up to $7,500 or loans of up to $20,000.

Applicants must perform modifications and repairs, maintain a hygienic and safe environment, and/or address safety and health concerns as stated previously.

Grants are available for homeowners 62 years of age or older who are unable to repay a Section 504 loan.

Rehabilitation funding is offered at a 1% interest rate for up to a 20-year period.

A comprehensive title insurance policy and a mortgage are needed for loans of $7,500 or more.

If the subject property is sold within three years, the grant may be recaptured. Recapture is a fancy word for payback.

Grant monies may be used exclusively to cover the cost of repairs and enhancements necessary to eliminate health and safety issues.

If the applicant is able to repay part of the rehab expense, the funding and a grant can be combined for up to $27,500 in assistance.

The Rural Housing Service does not demand compliance with code standards for rehabilitated houses.

However, waste and water systems, as well as any associated fixtures, must adhere to any applicable municipal health department regulations.

Rural Housing Service (RHS) is a United States Department of Agriculture (USDA) division (RD).

SOURCE: USDA underwriting guidelines