If you’ve only compared mortgage rates published by banks and private lenders, you could be missing out on loans backed by the federal government. For example, there are mortgages that are issued and guaranteed by the Department of Agriculture. USDA home loans are available for low- and middle-income buyers and homeowners who want to renovate their homes. Before you apply, it’s important to understand who qualifies for the programs.
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How USDA Home Loans Differ From Conventional Loans
Unlike traditional mortgages, USDA home loans require no down payment. They can be used to finance up to 100% of a home’s property value. And with below-market mortgage rates, they’re low-cost mortgages for qualifying borrowers.
If you’re eligible for a USDA home loan, you won’t have to pay private mortgage insurance (PMI). Borrowers with conventional mortgages are usually responsible for paying PMI when their down payment is less than 20% of their home’s value. Instead, folks with USDA loans pay an upfront mortgage insurance premium and an annual fee. Insurance rates for USDA home loans are usually less than those paid by borrowers with conventional or FHA loans.
USDA Home Loan Programs
There are several types of USDA mortgages, including loans for multi-family homes, guaranteed loans for buyers who want single-family homes and direct loans. There are also loans and grants for homeowners who want to upgrade and repair their homes.
Guaranteed loans for single-family homes are geared toward low- and moderate-income borrowers. These mortgages are issued by local lenders and backed by the USDA. Direct loans come from the USDA and are part of a program that targets low- and extremely-low income households. The multi-family loan programs offer direct loans and loan guarantees to households looking for affordable rental housing units.
USDA Home Loan Requirements
The USDA tends to issue and guarantee mortgages when applicants are in desperate need of financing. Families and individuals can only qualify if they aren’t eligible for conventional home loans and their current housing conditions are inadequate, unsanitary or unsafe.
There are other criteria that borrowers need to meet to qualify for a USDA home loan. For example, individuals and families must agree to use the financing for a primary residence in a rural or eligible suburban area. Income limits vary by location and household size. So you’ll need to visit rd.usda.gov to find income requirements for specific cities and towns.
If you want to apply for a direct loan for a single-family home, your property must meet certain requirements. Its square footage can’t exceed 2,000 and it can’t be an income-producing property. What’s more, the home’s market value can’t exceed the local limit.
Other Requirements for Loans Backed by the USDA
Individuals are welcome to apply for loan guarantees even if they have bad credit. If your FICO credit score is 620 or higher and you’ve had no major delinquencies within the past few years (and no late marks within the past 12 months), you’ll likely be eligible for a streamlined underwriting process. If your credit score falls between 580 and 619, your lender will take a closer look at your application to assess the risk of lending you money.
Qualifying for a USDA-backed loan with a credit score below 580 isn’t impossible. But it’ll be more challenging. If your score dropped significantly due to a financial hardship, you’ll need to bring that to your lender’s attention. If you don’t have a credit score at all, a lender may be able to evaluate your creditworthiness through other means, like reviewing your record of paying rent.
Finally, there are requirements regarding your debt-to-income ratio. Your monthly housing costs cannot exceed more than 29% of your monthly gross income. And your total debt-to-income ratio (monthly housing costs plus all other monthly debt obligations) generally cannot exceed 41%. Having a high credit score (above 660) can help you qualify for a USDA home loan when you have a high debt-to-income ratio.
The USDA home loan program makes homeownership possible for low- and middle-income individuals and families who can’t qualify for conventional loans. If you think you could be eligible for a USDA home loan, you’ll need to reach out to an approved lender to begin the application process.
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