The Step-by-Step Guide to Getting a USDA Direct Loan

USDA loan graphicAre you looking for a way to get a USDA direct loan? If so, this guide is for you. In it, we'll outline the steps necessary to get approved for a USDA direct loan, and the benefits of taking this route. We'll also provide tips on how to make the most of your application process.

What Is a USDA Direct Loan?

The Section 502 Direct Loan Program, commonly known as the USDA Direct Loan Program, aids home buyers with low and very low incomes in locating suitable, hygienic, and safe housing in rural regions. In order to boost an applicant's capacity for repayment, the program offers payment assistance.

The payment subsidy decreases the monthly mortgage payment. Based on their adjusted income, a family's eligibility for assistance is determined.

The Direct loan program aids borrowers in purchasing real estate that complies with specific requirements and is situated in a specified rural region.

A USDA Direct Loan may be available to borrowers who are unable to secure funding from other sources.

USDA Direct Loan Income Limits

USDA income limits graphicFamilies with low and very low incomes are the major recipients of USDA direct loans. The borrower's base income must be between 50 and 80 percent of the median income in the region. Extremely low income is below fifty percent of the median income.

On the USDA's website, the most current income limits may be viewed. The USDA Direct loan is only available to applicants who meet the income requirements.

USDA Loan Term

For USDA direct mortgages, loan terms of 10, 25, 30, and 33 years are offered.
For homebuyers whose income is less than 60 percent of the area median income (AMI) and who cannot afford a 33-year term, 38-year terms are available. The maximum allowed loan term for manufactured homes is 30 years.

USDA Direct Loan Interest Rate and Payment Assistance

The Rural Housing Service sets the monthly interest rate for the Direct loan program.

As of 1 June 2022, the current interest rate for Single Family Housing Direct mortgage loans for low-income and extremely low-income borrowers is 3.00 percent.

A fixed interest rate based on the market rate at the time of loan approval or maturity, whichever is lower.

Adjusted for payment assistance, the interest rate may fall as low as 1%.

Most Direct loans offer a term of 33 years; but home buyers with very low incomes who cannot afford the 33-year repayment period may be offered a 38 year term.

Payment assistance is a subsidy that decreases the monthly installment payment of a borrower by applying payment assistance, which cuts the interest rate to as low as 1 percent.

Down Payment Requirement

Typically, no down payment is required. The applicant's assets must not exceed the asset limits of $20,000 for senior applicants and $15,000 for all other candidates.

Eligibility for a USDA Direct Loan

Eligibility for a Single Family Direct Home Loan is determined by a variety of variables, including the applicant's income and awareness of their commitment to repay debt. Families must be unable to afford suitable housing yet still be able to make mortgage payments.

  • Applicants must not be eligible for credit elsewhere.
  • They must show a desire and capacity to repay debt.
  • Repayment ratios indicate whether or not the loan can be repaid.
  • Lack access to secure, sanitary housing
  • Use the home as your primary residence
  • Legally permitted to incur debt
  • Meet conditions for citizenship or noncitizenship
  • Not be barred or excluded from participation in governmental programs

Additional eligibility requirements:

  • Only first-time homebuyers are required to complete a course on how to purchase a property.
  • The applicant's household income must not exceed the area's low-income threshold.
  • If your income is less than 50% of the AMI, you have a very low income.
  • Low income ranges between 50 and 80 percent of the AMI.

USDA 502 Direct Loan Credit Requirements

  • The lending decision is not based on credit score.
  • No minimum credit score is required.
  • The credit score is used to speed up the application process.
  • Alternative method of credit verification can be used for home buyers with an inadequate credit history.
  • Ineligible for a Section 502 loan is any applicant having an outstanding judgment obtained by the United States in a Federal court other than the United States Tax Court.

Additional Requirements:

  • Home buyers should need suitable housing.
  • Agree to use the home as your principal residence.
  • Legal ability to incur debt (generally 18 years old).
  • Participation in federal programs cannot be denied.
  • Be a U.S. citizen, a U.S. non-citizen national or a qualified alien.
  • Provide identification documentation.

USDA Direct Loan Property Eligibility

USDA home loans are only accessible for homes situated in qualifying rural and suburban areas. You may only use a USDA mortgage loan to buy your principal residence. The USDA forbids vacation and investment properties. You cannot occupy a single apartment inside a multifamily structure.

  • The house must be under 2,000 square feet in size.
  • Not have a market value that exceeds the area's maximum borrowing limit. Not be used for activities that generate a profit.
  • The cost, size, and design of housing must be modest.
  • Market value must not exceed area loan limit.
  • Homes must comply with state construction codes and RHS site requirements.
  • Permitted in-ground swimming pool (new change).
  • Subject to environmental evaluation and property inspection.
  • Manufactured homes must be permanently placed, acquired from an authorized vendor, and must be new and never occupied.
  • The Housing Construction and Safety Requirements, as well as the RHS thermal and site standards.

Rotating question maarkkFrequently Asked Questions

Q. How do I apply for a USDA direct loan?
A. Go to the USDA state office lookup page and call the office for application information.

Q. How long does it take to get approved for a USDA direct loan?
A. The USDA direct loan process can take anywhere from a few weeks to a few months. The time it takes to get approved depends on a variety of factors, including the completeness of your application and the amount of funding that is available.

Q. Can I refinance a USDA Direct loan?
A. Yes. The USDA offers three exceptional refinance loans. The Streamline Assist is the most popular program. The Streamline Refinance offers a few more opportunities above the Streamline Assist. The Non-streamline refinance program is a good refinance loan.

Q. What is the credit score for a USDA Direct loan?
A. The USDA does not have a stated credit score.

Read more about USDA loans with our questions and answers page

Conclusion

In conclusion, if you are looking for a home and would like to take advantage of the USDA loan program, make sure to follow these simple steps. By doing so, you will be on your way to securing a home loan that is perfect for your needs.