The U.S. Department of Agriculture’s Rural Development program clearly articulates and supports the vital importance of affordable, stable housing for rural American communities. To assist homeowners in rural areas, the USDA loan program allows qualifying moderate, low, or very low-income Americans to buy, build or repair homes located in rural areas across the United States.
3 Types of USDA Home Loans
- Housing Direct Loans
- Housing Guaranteed Loan Program
- Housing Repair Loans & Grants
Specific program criteria may vary, but eligibility for a USDA guaranteed loan is largely determined based on income. Since the program is designed to assist families with demonstrated economic need, a borrower’s adjusted gross income should fall below 115% of the median income for that area.
The United States has long recognized that home ownership is a key hallmark of economic stability and thriving communities. In 1949, the American Housing Act was passed, which first recognized that home ownership could be a key step in revitalizing weakened communities and creating much-needed jobs to generate tax revenue after the struggles of World War II. The passage of this act led to the development of millions of homes across the U.S. and made homeownership possible for many Americans who otherwise may have rented.
When it comes to the development of rural areas of the country, the U.S. Department of Agriculture historically has played a key role in ensuring that rural communities have the opportunity to prosper through home ownership. While you may associate the USDA with farming, crops, and forestry, it also plays an important role in rural development.
Under the American Housing Act, the USDA was authorized to guarantee home mortgage loans for rural homebuyers that could be accessed without needing to have a down payment, much like a Federal Housing Administration, or FHA loan. By helping approved lenders offer loans with no down payment and with more favorable repayment terms than a conventional loan, the USDA helps ease the path to home ownership – ultimately, helping rural families save more and invest more in helping their communities thrive.
What Is a USDA Home Loan?
USDA mortgage loans are competitively priced home mortgage options that can make purchasing a home more affordable for low-income families living in rural areas across the country. The USDA guarantees these loans in much the same way the U.S. Department of Veterans Affairs backs VA loans for eligible veterans and their families. This government backing translates to lower interest rates and more favorable terms for homebuyers in many cases. In other words, when your approved lender issues you a USDA mortgage, they essentially take on no risk; the lender can be sure that your mortgage payments will be made since they are backed by the U.S. government.
For those who qualify, you can purchase a home with no down payment, but you still need to pay closing costs. Any USDA loan is designed to help homeowners in rural areas repair, refinance, build or buy well-built, stable, and affordable housing.
Loans under this program are administered for geographic areas of the United States that meet the USDA definition of “rural.” The USDA offers a tool on its eligibility site that allows you to enter a specific address for a determination of whether the property is eligible for the program. Rural areas may include everything from the outskirts of town or an area with large farms to simply a suburb of a large city – for all practical purposes, anywhere not considered “urban” may fall within the USDA’s definition of rural or lightly populated.
It may surprise you that 91% of the United States is considered rural, so if you’re thinking about buying a home in a less populated area, you might check on whether a USDA loan is an option for you. Loans issued under the USDA mortgage loan program may be used to build, repair, renovate or relocate a home, or to purchase and prepare a home site, including preparing water and wastewater service.
USDA financing typically requires a credit score of at least 640 for approval, but in certain cases, borrowers may be approved with a lower credit score and even with no credit score at all. These determinations are made on a case-by-case basis.
3 Types of USDA Home Loans
Now let’s take a deeper dive into each of the three types of USDA home loans.
Housing Direct Loans
With these types of mortgage loans, borrowers in rural U.S. areas may access financing to either build or buy a home with no down payment. You might also see this program referred to as the Section 502 Direct Loan Program. Direct loans secured through this program often are accessible to those with low or very low incomes and offer a 33-year term that may include payment assistance as applicable, which may provide a subsidy that lowers the mortgage payment for a defined period. For some very low income homebuyers who can’t afford the 33-year term, some direct loans can also be awarded a 38-year payment term.
To be considered for a USDA direct loan, a borrower must show a documented adjusted income that is either at or below the applicable low-income limit for their area. A home buyer must also demonstrate both the willingness and the ability to repay the loan amount.
In addition, applicants must be able to show the following:
- They currently are without safe and affordable housing
- They have been unable to secure financing for a home, with terms they could reasonably be expected to meet, through any other financing method
- They have the legal capacity to take on the loan amount
- They will occupy the financed property as their primary residence
- They meet citizenship requirements for the program
- They have not been suspended or prohibited in any way from participating in government programs
In addition, homebuyers must meet income eligibility requirements for direct loans, which vary by state, so it’s important to understand the specific requirements for your geographic area.
Properties that are financed through direct loans must meet the following criteria:
- The property must not be designed for an income-producing activity
- The property must measure fewer than 2,000 square feet
- The property must have a market value equal to or below the limit of the USDA loan the borrower is seeking
Under these guidelines, a USDA loan could be used to purchase a condo, manufactured home, or modular home, but it could not be used to finance a working farm or other agricultural endeavors.
The borrower must repay either all or some portion of the payment subsidy received over the life of the loan when the property title transfers or the home buyer no longer lives on the property. The mortgage rate for USDA single family housing direct home loans is 3% for low-income and very low-income borrowers. It’s worth noting that a USDA loan is a fixed rate mortgage loan for either a 15- or 30-year term. No USDA home mortgage loan features an adjustable interest rate.
As a general rule, homebuyers aren’t required to make a down payment to access a USDA single family housing direct home loan, though borrowers with assets over a certain threshold may be asked to use a portion of those assets as a down payment. And, of course, if you would like to make a down payment, you certainly can. It just isn’t a requirement for being approved for the USDA loan.
USDA loans aren’t good only for first-time home buyers – they’re also a good option for refinancing a rural home mortgage through the USDA Streamline Refinance process. Through the quick and easy approval process, you’ll need to document only that you have paid your mortgage on time over the previous 12 months and that by refinancing, your monthly payment will lower by at least $50 per month.
Housing Guaranteed Loan Program
This USDA program makes it possible for moderate and low-income homebuyers to purchase or build a home in qualifying rural areas, working through approved lenders. Approved applicants may buy, build, renovate or even relocate a home in an eligible rural area with 100% financing. The USDA provides a 90% loan note guarantee to approved participating lenders, which greatly reduces the risk associated with granting loans to homebuyers with no down payment.
A successful applicant must be a U.S. citizen or qualifying non-citizen, along with meeting income eligibility guidelines and agreeing that they will occupy the home they are purchasing as their primary residence.
Housing Repair Loans & Grants
Through this loan type, very low-income borrowers in eligible rural areas can access financing to improve, modernize, or otherwise renovate a home. In addition, the program provides grants to elderly, very low income rural citizens to help make sure their homes remain safe and healthy environments.
Successful applicants for this program must demonstrate the following:
- They own the home in question and use it as their primary residence
- They are unable to find an affordable loan through any other financing mechanism
- Their income level does not exceed the limit by which “very low income” is defined in their county
- In the case of grants, they are older than age 62 and cannot repay a renovation loan
While loans under this program may be used to cover a wide range of activities and costs associated with remodeling or repairing a home, a grant issued under this program must be used specifically to remedy health and safety hazards within the home. A loan amount may range from $10,000 to $40,000, and a home buyer may combine loans and grants to reach $50,000 in assistance.
Most loans issued under this program have a 20-year term, at 1% interest. A program participant may receive no more than $10,000 in grants over their lifetime from this program, and any grant awarded must be repaid in full if the homeowner sells the property within three years of receiving assistance.
USDA Home Loans
The U.S. Department of Agriculture’s home loan program is an important investment in homeownership for many American families. The USDA’s Rural Development Section 502 Direct Loan Program makes homeownership possible for many low and very low-income families across rural America. Many times, these families truly have no other way to access affordable homeownership.
Making rural homeownership possible ultimately promotes prosperity in rural areas. Families can build up savings over time, which results in thriving rural communities and improved quality of life for many Americans. In addition, helping elderly, very low income residents stay in their homes, while making sure they remain safe and free of health hazards, is essential to strengthening families, which in turn, strengthens their communities.