Updated on 07.08.15

USDA Loans: Not Just for Farmers

A USDA home loan can make your small-town American dream come true.

new paltz ny houses

You don’t need to live miles from your nearest neighbor to qualify for a USDA home loan. Most of the country is eligible, including small Northeastern college towns like New Paltz, N.Y. (pictured). Photo: Doug Kerr

If your income level, credit score, or down payment (or all of the above) are a bit too low for you to qualify for a conventional mortgage, and you don’t insist on living in a major metropolitan area, you might want to look into USDA loans and their eligibility requirements. USDA home loans, which were initially created to advance home ownership in rural areas, offer competitive rates, some key benefits, and simple rules for eligibility – even for low-income families with only fair credit and little to no down payment.

Unlike conventional mortgages, you don’t have to have great credit or a long credit history to qualify. In most cases, you can even get a USDA home loan with a small down payment – or no down payment at all — as long as you don’t have considerable assets to your name. And unlike most low- or no-down-payment mortgage programs, you don’t need to be a first-time home buyer to take advantage of USDA loans.

What’s more, you don’t have to move to a farm or the edge of civilization to qualify for a USDA loan. Much of the country is eligible territory, including some bustling villages and college towns in the dense Northeast.

Before we dig into all of the details, let’s start by exploring USDA loans and the factors that set them apart from conventional home loans.

USDA Home Loans: An Overview

First of all, most USDA loans aren’t offered by a traditional bank, but by the United States Department of Agriculture instead. Since the birth of the USDA home loan program in 1991, it has served as the government’s flagship program in the effort to boost rural home ownership.

Although USDA home loans are geared toward low- and middle-income households, a broader range of requirements can still help you qualify. That’s because there are actually two different kinds of USDA home loans, one of which has stricter requirements than the other:

  • Direct loans: Direct USDA home loans come directly from the U.S. Department of Agriculture. Direct loans are intended for low-income consumers whose household income is equal to or less than 80% of the local median income.
  • Guaranteed loans: Guaranteed loans offered through the USDA are granted by a third-party institution such as a bank. These loans are open to families with a broader income range, up to 115% of the local median income.

Direct Loans: How They Work

Direct loans from the USDA have more requirements in terms of their usage. For example, to qualify for a direct USDA home loan, the property you intend to buy must be “modest in size for the area” and not have “market value in excess of the applicable area loan limit.” Further, qualified homes can’t have in-ground swimming pools or be designed for income-producing activities.

Because these loans are geared toward families and individuals with a financial need, the rules for USDA direct loans are slightly more strict. Loan amounts are limited by an individual’s personal income and ability to repay, plus the area’s “loan limits,” which are determined by the USDA based on local factors.

Although borrowing requirements are strict, direct loans do offer some flexibility in how the funds are used. Not only can you use USDA rural development loans to purchase a rural property, but you can also use the funds to build, repair, renovate, or relocate a home. Meanwhile, certain upgrades such as site preparation and water and sewage line installation may also be eligible.

Guaranteed Loans: How They Work

Guaranteed loans from the USDA work similarly to direct loans, but with a few exceptions. For starters, they have a much broader range of eligible uses, from refinancing to home upgrades. According to the U.S. Department of Agriculture, funds accessed through USDA guaranteed loans can be used for:

  • New or existing residential property to be used as a permanent residence, including reasonable and customary closing costs
  • A site with a new or existing dwelling
  • Repairs and rehabilitation associated with an existing property
  • Refinancing of eligible loans
  • Design features or upgrades aimed at making a home accessible to a handicapped household member
  • Connection fees for utility installation and hook-up
  • Reasonable and customary real estate taxes
  • Installation of upgrades or appliances such as wall-to-wall carpeting, ovens, ranges, refrigerators, washers, dryers, heating and cooling equipment as long as the equipment is conveyed with the dwelling
  • Upgrades that improve energy efficiency (e.g. insulation, double-paned glass and solar panels)
  • Installing fixed broadband service to the household as long as the equipment is conveyed with the dwelling
  • Site preparation costs, including grading, foundation plantings, seeding or sod installation, trees, walks, fences and driveways

Unlike direct loans, which are issued directly by the USDA, individuals interested in a guaranteed loan start the process by reaching out to an approved third-party lender. As the U.S. Department of Agriculture notes, however, this program “provides a 90% loan note guarantee to approved lenders in order to reduce the risk of extending 100% loans to eligible rural home buyers.”

In other words, the USDA backs up each of these loans in case of default. With these assurances, third-party lenders are able to impose fewer requirements and income standards on borrowers – a step that helps this program accomplish its goal of making small-town homeownership more attainable.

Do I Qualify for a USDA Home Loan?

All those details and requirements might make USDA loans sound complex, but qualifying for this program may not be as difficult as you think. Most of the time, your eligibility for a USDA loan will depend heavily on the median income in your area – and how your personal income stacks up. If your income is fairly low, especially compared to your neighbors, you have a really good shot at securing a USDA loan.

And if you’re thinking you have to live way out in the sticks to qualify for a USDA home loan, you’re incorrect. Due to the subjective nature of the term “rural,” in this case, it is most commonly used to describe homes and properties that are not near any large cities.

In other words, you don’t need to buy a home light years away from civilization to qualify. In most cases, a modest home in any small town will do just fine. You can search a map of eligible areas on the USDA’s website.

When figuring out whether to apply for a USDA direct loan or guaranteed loan, it might help to take a look at the requirements. Here’s what you need to qualify for each type of USDA home loan, courtesy of the USDA:

Direct USDA Home Loan Requirements

To qualify for a USDA direct loan, you must:

  • be without decent, safe, and sanitary housing;
  • be unable to obtain a loan from other resources on terms and conditions that you can reasonably be expected to meet;
  • agree to occupy the property as your primary residence;
  • have the legal capacity to incur a loan obligation;
  • meet citizenship or eligible non-citizen requirements; and
  • not be suspended or debarred from participation in federal programs.

USDA Guaranteed Home Loan Requirements

Qualifying for a USDA guaranteed loan is a bit easier. You must:

  • meet income-eligibility requirements;
  • agree to personally occupy the dwelling as their primary residence;
  • be a U.S. Citizen, U.S. non-citizen national or Qualified Alien;
  • have the legal capacity to incur the loan obligation;
  • have not been suspended or debarred from participation in federal programs;
  • demonstrate the willingness to meet credit obligations in a timely manner; and
  • purchase a property that meets all program criteria.

Because income requirements are based on median incomes in your area, there is no hard and fast income cut-off or rule. It all depends on where you live, and how wealthy or poor your neighbors and community members are.

If you’re worried you may not qualify, you should also know that the USDA can sometimes go to great lengths to extend these loans. If you’re on the edge of qualification or worried you won’t be able to repay, the U.S. Department of Agriculture might make special exceptions or offer assistance. For USDA direct home loans especially, the USDA offers incredibly low interest rates, payment assistance, and a payback period of up to 38 years.

Should I Apply for a USDA Home Loan?

If you want to purchase a home and have shaky credit or little to no credit history, a USDA loan might be the best way to get into permanent housing. Low-income, rural individuals with few assets are also great candidates for both direct and guaranteed USDA rural development loans.

Another important detail to consider: As long as you stay put, you only need to qualify for the home loan once. In other words, taking advantage of the USDA loan program and locking in an affordable mortgage in a year when your income is low doesn’t mean you can’t earn more money in the future.

The bottom line: If you’re in the market for a modest home in a rural area or small town and you have a relatively low or average household income, you have nothing to lose by applying for a USDA home loan and seeing where the process takes you.

Frequently Asked Questions About USDA Loans

Do USDA home loans require a down payment?

No. Qualified borrowers can purchase a home with no required down payment, which can save thousands of dollars in upfront costs.

Do USDA home loans have PMI?

No. Instead of private mortgage insurance (PMI), USDA loans include a premium for upfront mortgage insurance in your loan. The cost of this insurance is typically 2% of your total loan cost.

Are USDA home loans only for first-time buyers?

No. Families and individuals who have owned homes previously are not barred from accessing the program.

Can you take out a USDA loan for a rental or investment property?

No. USDA home loans can only be used for your primary residence.

How much are closing costs on USDA loans?

Closing costs can vary widely depending on your location and specific home loan. However, you may be able to wrap closing costs into your home loan. Ask your lender or USDA representative for more information.

Can you use a USDA loan to purchase a modular property?

Yes, but appraisal requirements still apply.

What is the purpose of USDA home loans?

Per the U.S. Department of Agriculture, this program “helps lenders work with low- and moderate-income families living in rural areas to make home ownership a reality. Providing affordable home ownership opportunities promotes prosperity, which in turn creates thriving communities and improves the quality of life in rural areas.”

How can I determine if my family or a property we’re interested in is eligible for a USDA loan?

The U.S. Department of Agriculture lists a number of resources that can help you determine eligibility on the USDA website.

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