USDA loans are home loans issued or guaranteed by the United States Department of Agriculture. These loans are part of the USDA’s Rural Development program and were designed to encourage homeownership in small communities across the U.S.. These loans offer low-interest and require low down payment. Borrowers must live in a rural area in order to qualify.
Per USDA, rural area is defined as having a population of fewer than 35,000 residents. Borrowers can potentially take out a mortgage at 100% of their home purchase price. They must use these loans to finance a primary residence and must purchase two types of mortgage insurance:When you get a USDA loan, you are required to purchase mortgage insurance that will cover your mortgage payments if you lose your job and are unable to pay.
There are two different types of mortgage insurance premiums required by the USDA: 1% of the loan amount due at closing and 0.35% of the original loan amount per year. Additionally, USDA loans require that a borrower's income does not exceed a certain limit which is 15% above the median salary for their area.
To be eligible this loan, the following are required:
- Loan must be used for a primary residence
- Property must be in a rural area, defined as having fewer than 35,000 residents
- Borrowers must meet down payment requirements (down payments may be zero for some programs)
- Borrowers don’t have to have a minimum credit score to qualify must be able to demonstrate financial capacity
- Borrowers must not have incomes that exceed pre-set limits
- Borrowers must have a debt-to-income ratio of 41% or lower
USDA home loans have the following benefits to borrowers:
- Potential for 0% down payments
- Below-market rates
- Home loan up to 100% of home purchase price
- Some loan programs are partially comprised of grants
