A Guide to Buying USDA Homes; How Does It Work?

First time home buyers go through a hard time coming up with the down payment. This is what home financing options require, and it is common to see people shying away from buying homes due to this.

However, there are some loans, especially those backed by the government that require little or no down payment. They serve as great options for people who never thought of owning their homes, as they can apply for them and get financing.

USDA Home loans are some of the best in the United States, and if you won’t find many loans that match up to what they offer. These are rural development loans that were created to help people living in these areas to buy homes.

usda homes

Types of USDA Home loans

These loans come in two types;

1. USDA Guaranteed loan program

This is the most common type of loan, and it allows borrowers to get financing from USDA approved private-sector lenders that are guaranteed by the government. It offers 15- or 30-year mortgages.

2. USDA Direct Loan Program

Here, the USDA offers mortgage payment assistance to help borrowers make payments for a set period. Participants of the program borrow money from the USDA directly, and they can get interest rates that are as low as 1%, depending on the scenario. The mortgage terms usually span between 33 and 38 years, depending on the financial muscle of the borrower.

How Do These Loans Work?

These mortgages are offered by approved lenders who are some of the famous financial institutions we interact with daily. The USDA does not have any preference when listing the lenders, but it has a list of approved ones on their site for borrowers to choose from. Aside from this, it has a list of USDA Guaranteed Loan Program local contacts on their website. The USDA and not third-party lenders approve mortgages for the direct loan program.

When shopping around for a loan, do not throw away the tips used to get the best rates as they still apply here. There is no fixed rate used by all the lenders, and it all goes down to your credit score and other terms. This way, it is essential to shop around for the best rates before settling on a particular lender.

USDA Home Loan Eligibility

With such favorable terms, it is evident that many people looking for home loans will lean towards the USDA ones. This is why the eligibility requirements are stringent, as they are meant to ensure that the loans benefit the people who need it. The eligibility is assessed based on the USDA home and borrower. Read on;

  • USDA homes must be located within the stipulated rural area or community. In some cases, pockets of areas in the suburbs contain eligible homes. You can check with their eligibility tool on the website to confirm if a property meets the billing.
  • USDA homes must be in good condition. An assessor will review the house to determine its market value and confirm that it meets the set quality standards.
  • USDA homes must be single-family residential units. Multifamily units are not eligible for the program.

For the Direct Loan Program, other home eligibility requirements apply, including limitations on the size of the property and the presence of specific amenities.

USDA Borrower Eligibility

A borrower should meet specific eligibility requirements before their loan request is approved. They include;

  • Be a United States Citizen who is eligible to participate in government-backed programs
  • Show a track record of paying bills in time
  • No bankruptcy or foreclosure in that past three years

Aside from that, there are additional requirements that pertain to the mortgage and terms directly. They include;

  • The borrowers should have a credit score of 640, though there are cases where borrowers can qualify for a loan with a lower score. People with poor scores are subject to a manual underwriting process as the lenders will have to dig deeper into their financial history before approving the loan.
  • USDA guidelines indicate that a borrower should spend a maximum of 29% of their monthly income to pay for the mortgage and other related expenses.

USDA Loan Costs

USDA loans are not very different from regular ones, and the same costs apply. The mortgage rate you get is calculated based on your credit score and other factors. Those with good credit scores get the best rates. The rates are lower than the regular loans since the government guarantees the lenders.

Closing costs still apply, but here, they are added to the loan balance if the borrower cannot afford to pay them upfront. This reduces the amount borrowers need to pay upfront to buy a house.

USDA homes have given people who had no hope of buying a house a great opportunity to do so. Very few mortgages beat the rates and conditions of the USDA home loans, and if you are eligible for one, do not let this opportunity of owning a home pass you.