The current economic climate has made getting a home loan more difficult than ever. No longer are good credit and a steady income sufficient for mortgage qualification. For many families, a USDA loan can make homeownership a reality.
How a USDA Loan Works
Banks and traditional mortgage lenders often shy away from providing home loans to low- and moderate-income families. The USDA began the Guaranteed Rural Housing Loan Program to help these families qualify for a traditional home loan, sometimes without even a down payment.
Rather than issuing the loan, the USDA guarantees the bank’s loan. This measures significantly reduces the financial risk of lending to someone who does not have ideal qualifications for a loan. Each lender must be approved by USDA Rural Development, to ensure that they are reputable and solvent.
The USDA charges a one-time fee to guarantee the loan. For new purchases, the fee is 2% of the loan amount. For refinancing, the fee is 0.5% of the loan. Usually the lender builds this amount into the closing costs, which can also be covered by the loan.
Closing costs, title services, legal fees, and escrow expenses can also be covered by the loan. Therefore people can use a USDA loan to purchase a home with virtually no up-front expenses.
Who Qualifies for a USDA Loan
The USDA Rural Development program targets individuals who live in rural areas. This includes areas with populations of less than 10,000 and some communities that have 10,000 to 25,000 residents. Other requirements include the following:
- Sufficient reliable income that does not exceed the area limit for moderate income
- The total of principal, interest, taxes and income (PITI) cannot exceed 29% of the gross monthly income
- US citizenship, or status as a qualified alien or permanent resident
- Positive credit history, with total debt not exceeding 41% of gross monthly income
- Intent to use the home as a primary residence
Applicants need not have money for a down payment, as this expense can be included in the loan.
What Homes Can Be Purchased with USDA Loans
Loans can be used to purchase either pre-existing or new homes, so long as the homes are in good repair, structurally sound, and functionally adequate. Neither the size or design of the home is restricted, but the home cannot be used to generate income.
The home must be located in an eligible area. A USDA Rural Development field office can help potential homeowners determine eligibility of a property.
For more information about USDA loans, visit the USDA website. To learn more about buying a home, or to find a home in the Naples area, contact us at Clausen Properties.
Ian Clausen
Are USDA loans still going to 100% LTV in rural areas?
isnt this just lending to people who cant afford? The reason we got in to this econimic state in the first place?
Thanks for the post. I try to explain USDA loans in an easy to understand way, but people always seem to get confused. I really liked your explanation and will be passing this along to people that can’t comprehend these loans