What are USDA Home Loans? Do I Qualify?
Deciding between rural and suburban is one of many choices you'll make along your homeownership journey. And if the countryside is your preference, then you may want to consider applying for a USDA loan. You've probably heard of the USDA loan program, as it's one of the more popular mortgage loans available. However, you may not know too much about the particulars, such as whether you qualify, what closing costs are like and which mortgage lenders offer them.
You're about to learn more about all this so you can determine if this loan is right for you.
What is a USDA-RD loan?
The USDA loan program is a mortgage offering backed by the United States Department of Agriculture. More formally known as a USDA-RD loan - the RD short for "Rural Development" - this mortgage product is geared toward families who plan on buying in a rural neighborhood. Rural home loans are designed to provide low- to moderate-income families with more of an opportunity to buy a home at an affordable price. Due in part to high demand and stretched inventory, home prices are on the rise in most locations. Indeed, according to the most recent estimates from the National Association of Realtors, the typical single-family residence in the U.S. costs around $280,800. As of July, existing-home prices have increased for 89 months in a row on a year-over-year basis.
Of course, a USDA loan doesn't reduce the cost of a property's listed price, but it can provide certain benefits that may make it a bit easier for borrowers to qualify. For example, you may be eligible for a lower down payment than you would be with a different mortgage product, perhaps even 0% down.
What are the main advantages of a USDA-RD loan?
Low or no down payment loans often get mischaracterized as mortgages that box borrowers in, leaving them with fewer options in terms of where they can buy their house or for what purposes. This certainly doesn't apply to USDA loans. They allow for a great deal of flexibility. For example, aside from buying a residence, you can also use this mortgage for refinancing or home improvement purposes. Additionally, you may be surprised by the loan amount for which you're eligible. This depends on the state you live in and how much you earn. USDA loans have fixed interest rates and are typically sold in 15-year and 30-year increments.
Furthermore, closing costs can be arranged so that they're included in the financing or paid in full or in part by the seller.
Another mischaracterization of rural loans is that since they only apply to rural locations, this prevents borrowers from considering houses that are in or near the city. However, what qualifies as "rural" applies to 97% of America's land area, according to the latest estimates from the U.S. Census Bureau. Translation: You likely have more options to buy outside the city than within.
What's the difference between a USDA direct loan and USDA guaranteed loan?
As a first-time homebuyer, it's important to understand the distinctions between a USDA direct loan and USDA guaranteed loan. While they both are provided through the Department of Agriculture, they're geared toward slightly different audiences. For example, the USDA guaranteed loan is typically taken out by borrowers who earn a moderate income, while the direct loan is designed for families who make substantially less per year than what's typical in their area, or low to very low. What qualifies as "low income," "moderate" and "very low" varies, but generally speaking, low income is 50% or less of the median salary in a given area while moderate is between 50% and 80%.
Another way USDA direct and USDA guaranteed loans differ from one another is who backs or finances them. For the former, it's the USDA directly, but for the latter, private lenders provide the funding.
As you might imagine, the qualifications necessary to be approved for a USDA direct loan versus a USDA guaranteed loan are also a bit dissimilar. Take credit history. For the direct home loan program, applicants need a "reliable" FICO® score of at least 640 ("reliable" in this context means three or more trade lines in the previous two years). For the guaranteed home loan program, the "validated" credit score minimum is 640 ("validated" is defined by USDA as two or more trade lines opened in the previous year or more).
Which one is best for you? That's something your lender can help you determine based on your needs and financial circumstances.
Who qualifies for a USDA loan?
Debt to income
When will you get a decision about approval?
Now that you know a little more about some of the qualifications associated with applying for a USDA rural development loan, you may be wondering about how long you can expect to wait before an approval decision. The journey to homeownership can be summed up in three words: It's a process. Lots of factors are analyzed and documents examined (e.g. paystubs, tax returns, proof of assets, employment information, etc.). Since each individual or family's situation is different, approval timeframes can vary. However, the average period is three weeks (this could be different for each state). Part of the reason for this is the multi-step aspect to authorization. In addition to your lender, the USDA also has to sign off on it before the decision becomes final, and prior to that, there needs to be an appraisal done on the property that you seek to buy.
There are a few things you can do, however, to speed up the process. For example, do your best to have all the information your lender asks for when they need it. This may include two years' worth of W-2 forms, tax returns, your credit report (or Social Security number so your lender can run a check) and a street address for your employer. You may also want to include the phone number of the business you work for as well.
You should also strive to avoid any drastic expenditures while your application package is processing. Life is literally event-full, involving milestones, memories and major purchases. But while you're awaiting a decision, put any forthcoming changes on the back burner for the time being. For example, if you're looking to buy a new car or go on an all-inclusive vacation, save that for some other day, as large purchases such as these could raise a red flag.
Finally, be reachable. There are a lot of working parts to applying for a rural development loan, and things may come up that your lender may need to talk to you about. Getting back to your lender in a timely fashion ensures that the approval process doesn't take any longer than it needs to.
If homeownership is your aim, a USDA home loan can help you reach the target. Please contact Residential Mortgage Services - we'll guide you home.