Guide to USDA Financing & USDA House Loans

When searching for a mortgage or home loan, many potential home buyers turn to government-sponsored programs that can offer assistance.

Well-known programs, such as loans from the Federal Housing Authority (FHA) or the Department of Veteran’s Affairs (VA) may be the first places potential home buyers turn to, but these aren’t the only options.

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In fact, one of the best government-sponsored home loan programs comes from the U.S. Department of Agriculture, or USDA.

USDA house loans can help you buy the home of your dreams without spending a fortune or making a huge down payment. In this article, we’ll look at how to find USDA-approved lenders and review your USDA home financing options.

Types of USDA House Loans

There are three kinds of USDA home financing options to choose from. The type of USDA loan you select will likely depend on what you are eligible for, what your specific needs are, and what you qualify for. In this article, we’ll focus primarily on loan guarantees from USDA lenders and how to find USDA-approved lenders.

  • Loan guarantees: Loan guarantees are available through many USDA-approved lenders. While the USDA won’t loan you money directly through this program, this reduces the risk for lenders of extending 100% loans to home buyers. This means low-income home buyers can get better interest rates, even if they don’t have the money to make a down payment.
  • Direct loans: In contrast to loans made by USDA-approved lenders and guaranteed by the USDA, a direct loan comes straight from the USDA itself. To qualify for a USDA home mortgage through this program, borrowers must have very low income. These USDA house loans typically are only granted for smaller homes that are below market value for an area.
  • Home improvement loans or grants: The USDA can also assist with making needed improvements to your home. A home improvement loan or grant allows you to update or repair your house, even if you’re short on cash.

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Who Is Eligible for USDA Home Financing?

USDA house loans aren’t available to everyone. In order to qualify for USDA home financing programs, homeowners must meet certain requirements. Because USDA home mortgage programs are designed to help low-income families, there are income limits for borrowers.

This table shows the current USDA definition of very low income, low income, and moderate income for areas across the United States. Those falling in the very low income or low income categories may qualify for a direct loan from the USDA or home improvement loans and grants. Those with moderate income may qualify for a loan through a USDA-approved lender.

Home buyers may have to meet additional requirements. The USDA targets and provides assistance for those individuals and families with the greatest need. USDA home financing is intended for those who can’t get a mortgage through traditional options.

In order to get a USDA-backed loan, you must be a U.S. citizen or a permanent resident. The monthly mortgage payments must be less than 29% of your income, and any other debt payments you make cannot be more than 41% of your income. You must also have a dependable source of income. Finally, there are credit score requirements; however, there are some exceptions for those seeking USDA home financing but who don’t have any credit history.

Eligible Locations

Even if you or your family meet all the eligibility requirements to receive a USDA-backed loan, you must purchase a house in an eligible location. USDA home financing is part of the USDA’s Rural Development program. The goal of this program is to help boost the economy of rural communities and encourage families to purchase homes in rural areas.

In order to get a USDA home mortgage loan, you must purchase a home in a rural area. Some less-populated suburban areas also qualify for USDA home financing, but urban homes don’t qualify. To see whether your home qualifies and to search for addresses that are classified as rural by the USDA, enter your address into the USDA property eligibility map.

USDA 100% Financing

One reason many families apply for USDA home mortgage loans is thanks to the availability of USDA 100% financing. In order to help individuals and families with limited means, the USDA allows buyers to finance 100% of the cost of their home. This means you don’t have to make a down payment to get a loan through a USDA lender.

USDA 100% financing allows those who might not otherwise be able to consider purchasing a home do so. However, this also means that there is a greater risk for the USDA in extending credit to these borrowers. To cover the costs associated with making these loans, buyers receiving loans through USDA-approved lenders must pay for mortgage insurance.

While far cheaper than a typical down payment, home buyers still have to pay a 2.75% up-front fee at closing. Additionally, buyers must pay an annual fee of 0.5% of the remaining principal balance.

Compared to other mortgage options, a USDA Rural Development home loan is still extremely affordable, even with mortgage insurance premiums. In fact, loans with 100% USDA financing tend to come with lower mortgage insurance premiums than other government-sponsored loans. For example, loans through the FHA, another popular government program, usually require the buyer to pay 0.85% in annual mortgage insurance premiums.

Another reason 100% USDA financing is a great opportunity for buyers is the low mortgage rates. For borrowers who can’t afford a down payment and who need the USDA 100% financing program to purchase a home, you might expect to pay high mortgage rates. However, if you get a mortgage through a USDA lender, rates are typically lower than those of other government programs, including the FHA and VA.

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USDA Home Loan Application

In order to get your USDA house loan, you’ll have to fill out the USDA home loan application. This can be done with the help of a USDA-approved lender.

The USDA home loan application is similar to other home loan applications. You’ll typically need to be able to prove that you have had a steady source of income for the past 24 months. You will also have to undergo a credit check, as with any mortgage application.

What makes the USDA home loan application different is that you must prove you meet the specific requirements of the USDA Rural Development home loan program. For example, you must show that your income falls within the eligible range and ensure the home you are purchasing is within the eligible area. Those with a higher income or who are purchasing a home in an urban area will not be approved for USDA RD home loans.

With the help of a USDA-approved lender, filling out the USDA home loan application should be a fairly painless process.

USDA-Approved Lenders

If you think a USDA loan is the right option for you, and you meet all the eligibility requirements, the next step is to find a USDA-approved lender. USDA-approved lenders work with the USDA to offer 100% USDA financing on mortgages.

Remember, these loans aren’t funded directly by the USDA. Instead, the USDA guarantees home loans for borrowers who complete a USDA home loan application through an approved lender and meet all the requirements of the USDA Rural Development home loan program. The mortgage loan itself will be provided by your USDA-approved lender.

There are hundreds of USDA lenders all over the country. You’ll rarely find lenders advertising the USDA Rural Development home loan program, but there are plenty of USDA lenders out there. The USDA itself has compiled a list of USDA approved lenders in every state, though the agency itself provides a disclaimer that this is not an exhaustive list of every USDA lender.

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6 Tips to Finding a USDA-Approved Lenderusda approved lenders

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Finding a good USDA-approved lender who you feel comfortable working with is trickier than just finding any USDA lender. Many lenders who offer USDA RD home loans don’t often assist buyers with this program and as such may be unfamiliar with recent changes or not knowledgeable about the program in general.

Follow these 6 tips to find the best USDA-approved lenders in your area.

1. Don’t Trust “Endorsements”

A quick search on the Internet for USDA-approved lenders turns up quite a few websites for organizations that try to make themselves look as though they are endorsed by the USDA. These organizations may put the word USDA in their name or URL somewhere and use the USDA logo to give the appearance of legitimacy.

However, be wary of such lenders. The USDA does not endorse any specific lender. One USDA-approved lender does not have any special connection to the USDA that other lenders don’t have. Look for a lender that is up front and honest.

2. Look for Experience

Some lenders, although they are USDA-approved lenders, don’t have much experience dealing with USDA RD home loans. Due to the relatively small number of people applying for USDA home financing, some lenders rarely deal with USDA home loan applications, even if they are a USDA lender.

It will be easier to find a lender with experience handling USDA RD home loans in rural areas. Although many suburban neighborhoods are eligible for USDA home financing, the program is likely to be more popular in rural areas where every home qualifies. This also means that many USDA-approved lenders are small lenders rather than big banks, so be sure to check out local institutions, too.

When meeting with a USDA-approved lender, ask questions about the program and your loan. The lender should be knowledgeable about the program and able to quickly answer your questions.

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3. Comparison Shop

When you’re looking to get any kind of mortgage or loan, it’s always a good idea to shop around. Don’t just go to one USDA lender. Talk to several USDA-approved lenders and see what each one can offer you. Even though all USDA rural development home loans are backed by the USDA, not all are created equal. You may get a better rate with one lender than with another.

Additionally, you can be rejected by one USDA lender and approved by a different USDA lender. Each lender has their own criteria, and just because you’re eligible for a USDA guaranteed home loan, that doesn’t mean you’ll automatically get one from a lender. If one USDA-approved lender rejects you, shop around for another USDA lender.

When comparing USDA lenders, be sure to get a quote from multiple lenders. This will help you find the best rate. When meeting with a USDA-approved lender, ask for a written quote to compare against other lenders. You could save hundreds of dollars just by looking around for the USDA lender with the best rates.

4. Ask Your Bank

If you already have a bank that you know and trust, see if they are a USDA-approved lender. Several big banks, including Wells Fargo and Bank of America, are USDA-approved lenders. If you already bank with an institution that you trust, ask about getting a USDA RD home loan.

However, be sure that your bank knows what they’re doing if you go this route. You may be happy with other services your bank provides, but not every USDA-approved lender bank has experience with USDA home financing. Ask specific questions before getting a USDA RD home loan through your bank, and be sure to ask what their experience is with USDA house loans.

5. Look for Top Lenders

The USDA regularly recognizes top lenders in each state. These USDA lenders are those who have provided the most USDA Rural Development home loans in their geographic area or state. While USDA-approved lenders who issue the most USDA house loans might not always necessarily be the best, it’s a good indicator of which USDA lenders have the most experience.

Because so many lenders are unfamiliar with the regulations and requirements of the USDA RD home loan program, working with a top lender ensures you’re working with a USDA-approved lender who really knows the program. These USDA lenders have proven experience and can usually help you get the best deal on your USDA RD home loan.

6. Do Your Research

Don’t just trust whatever your local USDA lender tells you. Do your own research on USDA house loans. If you can, find out what kinds of rates other borrowers around you are getting on USDA home mortgages.

The more you know about USDA home financing, the smarter you can be when choosing a USDA-approved lender. While you don’t have to be an expert on USDA house loans, it helps to know a little about what kinds of rates to expect, what homes are eligible, and what you need to do to qualify for your USDA RD home loan.

You can start by checking out the USDA’s website. Their page on USDA Rural Development home loans is full of information on the guaranteed loan program and gives you an overview of the program and how to get started with a USDA house loan.

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Is a USDA RD Home Loan Right for You?

If you are interested in purchasing a home in a rural or even suburban area, a USDA RD home loan could be an excellent option. As long as you have a decent credit history, a moderate income, and are a U.S. citizen or permanent resident, purchasing a home through the USDA Rural Development program is simple and surprisingly affordable.

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