In an effort to increase home ownership in rural areas, the United States Department of Agriculture started offering USDA backed loans back in 1991. By using a USDA loan, you can purchase, refinance, repair, or relocate a home, as long as the home is located in a rural area. This type of loan is designed to help only certain individuals, but it is very similar to other government backed mortgage loans, such as FHA (Federal Housing Administration) and VA (Department of Veterans Affairs) loans.
This type of loan was initially designed to help people living in rural areas become home owners, but it can also be used to finance multiple types of properties and even businesses. For those who qualify, the USDA offers 100 percent financing with low interest rates, and loan terms from 30 to 38 years.
Advantages to Choosing a USDA Home Loan
USDA home loans are designed to help people, so they will have more advantages when compared to other types of mortgage loans. Here are the most important benefits, which should help you decide if a USDA home loan is the right choice for you:
- The biggest benefit of the USDA home loan is that you receive 100 percent financing, which means that you won’t have to make a down payment. Down payments on conventional loans are usually 20 percent of the loan value, and one of the main reasons some people can’t afford to buy a home through a conventional mortgage loan. The only other loan that offers 100 percent financing is the VA loan, which is designed for current military members or veterans.
- Another benefit is the possibility of financing the closing costs into the loan. This is also a large advantage, because closing costs can sometimes be fairly high, and very hard to come up with, especially when moving into a new home. Most conventional loans will require you to pay the closing costs before being granted the loan, which makes it harder to qualify for those who can’t afford to pay these costs.
- Buying a home with less than perfect credit score will attract higher interest rates, or even make it impossible for you to qualify for a mortgage loan. With the USDA loan, the credit requirements are less strict, giving people, who otherwise couldn’t qualify for a mortgage loan, the possibility of becoming home owners.
- USDA home loans also come with lower interest rates. This means that not only you will be paying less monthly, but the overall value of your loan will be lower than if you were getting a conventional loan. Even if interest rates on conventional loans are lower at the moment, you will still get a better deal on your rate by choosing a USDA home loan.
Applying for a USDA Home Loan
Whether you are purchasing a home, refinancing, improving your home, or just taking advantage of the cheap land prices, doing it through a USDA home loan will bring you great benefits. However, to qualify for this type of loan, you need to meet a few criteria and be aware of the process. Here are the steps to applying for a USDA home loan:
- Select one of the two loan options that the United States Department of Agriculture offers. If your income is at or under 115 percent of the median income in the area, then you could qualify for the Guaranteed Housing Loan. If your income is very low or moderate, usually below 50 percent of the median income, you will be able to apply for a Direct Loan, or a Section 502 Loan. The home that you are planning to buy with a USDA home loan must be your primary residence and located in a rural area.
- Maintain your credit score at a decent level. You won’t need to have a perfect credit score in order to be granted a USDA home loan, but you will encounter problems if your credit score is very low. Foreclosure or bankruptcy on your credit report can even make it impossible for you to qualify for a USDA home loan. Also keep a low debt-to-income ratio or your lender will consider you a bigger default risk and refuse to give you the loan.
- Make sure that the home that you consider buying is located in an eligible area. Because they are designed to increase home ownership in rural areas, USDA home loans will only be approved for those who purchase homes in certain areas.
Applying for a USDA home loan is no different than applying for a conventional mortgage loan. The big difference is that this type of loan comes with greater advantages, the biggest one being the cost. The downside is that you can only use the USDA home loan to purchase a home in a rural area but, depending on each individual’s plans and situation, this might not be a downside at all.