Everything You Need to Know About USDA Loans
If you think of the USDA, you probably imagine grocery-store steaks and broad agricultural policy. But what about home loans?
The United States Department of Agriculture (USDA), in an effort to sustain and revive rural America, has been supporting home loans for many years. These loans are actually some of the most useful in the country, especially for borrower with little to no downpayment. If you are purchasing a home in a suburban or rural setting, you should look into USDA home loans.
USDA Loans: Everything You Need to Know About this Useful Option
“USDA loans” are mortgages supported by the United States Department of Agriculture. The USDA supports rural and suburban homebuying with three different strategies.
First, they make loan guarantees. Many “USDA loans” are not actually loans made by the organization, but are instead supported through mortgage guarantees. Essentially, the USDA tells lenders that if they make loans that meet specific requirements, they will provide a financial guarantee on the loan. If the mortgage goes into default, the USDA provides financial support to the lender. This takes the burden of risk off the lender and makes them more likely to issue loans.
Another way that the USDA supports homebuying is through actual lending. These efforts are less common and the USDA only funds loans for low-income households. The income thresholds will vary by the region.
Finally, the USDA supports homeownership through home-improvement grants and loans. This financial support allows homeowners to improve their properties and stay in the home, as opposed to having to leave a rural or suburban household.
The Advantages of a USDA Loan
Regardless of the specific loan or type of financing, there are clear advantages to using a USDA loan, assuming you and the property are eligible.
The biggest and most important advantage to using a USDA loan is that you can acquire financing with little to no downpayment. Other than VA loans, there really are no other options that allow zero-down financing. Even FHA loans, which are known for low-downpayment requirements, require at least 3.5% down for highly-qualified buyers; others will need at least 5% down.
With zero-down financing, the USDA makes these home purchases more accessible to the typical homebuyer.
Multiple Housing Types
The USDA also supports home buying by allowing you to purchase a wide variety of homes. Of course, the standard single-family home, which makes the backbone of the real estate industry, is certainly eligible. You can also use the loan option to purchase condos, townhouses, and other types of properties. Because these loans are available in many suburban areas and medium-sized cities, numerous condos and townhouses, not just country homes, are eligible for USDA financing.
Interest Rates Often Low
Interest rates will depend on numerous factors, including your credit profile and debt load. However, it’s typical (but not guaranteed) for USDA loans to have lower interest rates than many other forms of financing. Specific interest is never certain, but it’s common for these loans to have lower rates than conventional loans, FHA loans, and many other types.
No Reserves Required
While other loans require cash reserves, USDA loans do not. Cash reserves are simply funds held in a bank account that can be used to make mortgage payments if needed. Some loans may require the equivalent of six months to two years’ worth of cash reserves, but this is not the case for USDA loans.
Where are USDA Loans Available?
The biggest factor for a USDA loan is the location. Regardless of your personal income and credit, if the property is not located in an area that is eligible for USDA financing, you can’t use these loans.
A vast majority of the United States is covered by USDA loans. Practically all rural regions of the country will be eligible for this form of financing, and many suburban areas are eligible as well. Also, many medium-sized cities are eligible for USDA financing, so there’s a good chance that the area where you want to buy is covered by the USDA.
If you look at the map provided by the USDA, you see that most of the country is eligible. Only small pockets of metropolitan areas are not eligible for USDA financing, but even if you work in these urban centers, USDA loans may be eligible for purchasing homes nearby.
Take our region of San Diego and the surrounding area as an example. Most of the coastal metropolitan region is ineligible for USDA financing, but communities further east are eligible. Communities like Alpine and other areas in the regions east of our city are eligible for this form of financing.
Is the Property Eligible?
Even if the property is in an eligible area, it needs to meet specific requirements set by the USDA. If must have direct access to a street, highway, or road, which ensures you can properly use the space. If must also have adequate utilities, including water and sewer. This sounds like an obvious requirement, but rural properties often have utilities that are still being worked out.
Are You Eligible for a USDA Loan?
While USDA loans are eligible in certain areas, you still need to qualify personally. Much of the qualification is decided by the lender; different lenders have different requirements for their borrowers, so it can vary from one office to another.
First, there are income limits. Again, this will depend on where you are purchasing a home, but if you have a significantly large income compared to the general community, you may find that USDA loans are not an option. However, if your income is moderate, even above average but not massive, you will likely qualify.
To use these government-supported loans, you need to be a U.S. citizen or permanent resident, have a dependable income, and an acceptable credit history. We encourage you to contact our team to see if you meet the qualification standards for these loans.
The Right Loan, No Matter What Your Goals!
If you want to learn more about USDA loans, contact our team today. We’ll help you choose the right loans options so you can purchase a world-class property. Whether you want a country home on a quiet road or a high-rise condo in the heart of the city, we’ll make sure you find the best loan for your specific needs!