What is a USDA Home Loan?

Home loans from the United States Department of Agriculture (USDA) open the dream of owning a home to people in sparsely populated areas who otherwise couldn’t afford it. If you live in a place with less than 35,000 residents and you don’t qualify for a conventional loan, you may qualify for a USDA Guaranteed Loan or a USDA Direct Loan. One of these mortgage programs could be your ticket to get out of an overcrowded, unhealthy, or unsafe living situation and into a place of your own with running water, electricity, heat, plumbing fixtures, and plenty of space.

Key learning points

  • The United States Department of Agriculture (USDA) provides mortgages as a last resort to the rural people who need them most.
  • The qualifying standards for these home loans are mild compared to other mortgages, but you need a steady income high enough to pay off the loan over 30+ years at a fixed interest rate.
  • The definition of “rural” is broader than you might think, as it also includes areas with populations as high as 35,000.

What is a USDA Home Loan?

A USDA home loan is a mortgage taken out or guaranteed by the Rural Housing Service agency of the United States Department of Agriculture to help very low- to middle-income households purchase safe and affordable homes in rural areas. The Section 502 loan program has been running since 1949. Today, it provides low-cost financing to buy a home through two programs: the Section 502 Guaranteed Loan and the Section 502 Direct Loan. Both programs offer 100% financing to eligible borrowers.

The Two Types of USDA Home Purchase Loans

The USDA’s guaranteed and direct loan programs are very different, although they both offer housing in rural areas and offer no down payment financing. Here’s what you need to know about how each program works and how to qualify.

For both programs, you must not be in arrears with any federal debt and must be a U.S. citizen or legal non-resident alien.

Guaranteed USDA Loan

By guaranteeing 90% of the loan amount, the USDA makes it possible for mortgage lenders to offer these 30-year, fixed-rate loans with no down payment. You can use a guaranteed USDA loan to buy, build, repair, renovate or relocate a primary residence. Individual lenders set the interest rates they want to offer borrowers on these loans, so it’s important to shop around. This is how you qualify:

Deposit: 0%.

Resources: No.

Debt Income Ratio: 41%. If you have spent more than 41% of your income on debt payments in the past while still meeting all your financial obligations, you may still qualify.

Creditworthiness: No minimum, as long as you can demonstrate that you can repay the loan. It may be easier to qualify with a score of at least 640. However, you can still qualify if your score is lower or if you don’t have a score. You’ll have a stronger case if you don’t have arrears on your credit report or if you can provide a history of rent payments on time or another positive source of non-traditional credit.

Income: Low to moderate income, up to 115% of the area’s median income. May not qualify for conventional financing without private mortgage insurance (PMI). One-year history of traditional employment or a two-year history of self-employment or seasonal income.

Property location: Must have a population of 35,000 or less. This means that many suburban areas qualify, not just rural ones.

Property type: Primary residence, no income. The property must not have an in-ground swimming pool.

House Size: Should be considered modest for the area.

Property Size: Must be typical of the area.

USDA Direct Loan

Direct USDA loans come directly from the USDA and are intended for very low and low income borrowers who cannot obtain an affordable mortgage from other sources and who do not have decent, safe and hygienic housing. The typical term of a loan is 33 years, but loan terms can be up to 38 years.

The interest rate in September 2021 is 2.5%, but your effective interest rate can be as low as 1% after subsidies. With this loan you can buy, build, repair, renovate or move a main residence. To qualify for a USDA direct loan:

Deposit: 0%.

Debt Income Ratio: 41%, unless there are compensating factors, such as a history of comfortably spending a higher percentage of income on housing.

Creditworthiness: Ideally a minimum of 640. However, you can still qualify if your score is lower or if you have no score. You have a stronger case if you don’t have many delinquents on your credit report or if you can provide non-traditional credit, such as a history of rent payments.

Income Limit: Low and very low income. Limit varies by province and household size.

Property location: The location must have 35,000 residents or less. This means that many suburban areas qualify, not just rural ones.

Property type: Primary residence, no income. The property must not have an in-ground swimming pool.

House Size: 2,000 square feet or less.

Property Size: Small enough that it cannot be divided into smaller lots under local zoning laws.

How the USDA Loan Guarantee Works

USDA guaranteed loans (but not USDA direct loans) require borrowers to pay a loan guarantee fee of 1% of the loan amount. This fee can be paid by the lender. Borrowers are also required to pay an annual fee of 0.35% of the loan amount.

How to Get a USDA Home Loan?

Look for a guaranteed loan on the USDA’s List of Approved Lenders. These lenders offer USDA loans, but the USDA does not recommend specific lenders. You should shop around to make sure you are getting the best terms. For an instant loan, you can apply directly to USDA Rural Development. The financing for these loans comes from the government.

It comes down to

USDA guaranteed and direct home loans help very low, low and middle income borrowers in sparsely populated areas get affordable mortgages to buy modest homes with no down payment. If you thought you would never be able to afford a home or qualify for a mortgage and you live in overcrowded or unsafe homes, contact USDA Rural Development and see if one of their housing programs can help.

What Type of Home Loans Does the USDA Offer?

The United States Department of Agriculture (USDA) has two home loan programs: the Section 502 Guaranteed Loan and the Section 502 Direct Loan. Both are aimed at eligible low to middle income buyers to buy homes in rural areas.

With a guaranteed loan, 90% of the loan amount is covered by the Ministry of Agriculture. Because of the guarantee, lenders offer these loans with a fixed interest rate and no down payment. Direct loans are provided by the USDA to eligible buyers who cannot obtain an affordable mortgage from other lenders and who do not have decent, safe and sanitary housing.

What are the eligibility requirements for a USDA home loan?

The location of the residence must have a population of 35,000 or less and the residence must be a primary residence. Loans are available for low and middle income people. Income limits vary depending on where you live and the loan program. In general, a credit score of at least 640 is ideal, but you may still qualify if your score is lower. You also cannot be overdue on any federal debt and you must be a U.S. citizen or legal nonresident alien.

How do I apply for a USDA home loan?

To apply for a guaranteed loan, you must complete the USDA list with: approved lenders. Shop around to make sure you’re getting the best loan terms. For a direct loan, you must apply to USDA Rural Development.