One of the most misunderstood loans offered to US homebuyers is something called the Rural Development Loan, which is better known as a USDA Loan. However, because this type of loan makes owning a home highly affordable to homebuyers, it’s becoming increasingly popular.
Keep reading if you are a prospective homebuyer in 2022 (or beyond). This blog will give you top-line highlights to see if Movement’s USDA Loan can get you into a home in a region you may not have previously considered.
What’s a USDA Loan?
USDA Loans are government-backed mortgages purposely built to assist low and moderate-income families. It is not dissimilar to other loans — like the Movement’s VA Loan products — but it has different qualification requirements and a few different benefits.
Just because an applicant applies for a USDA Loan — which is made available by the Rural Development program and insured by the United States Department of Agriculture — doesn’t mean they have to live in isolation in the middle of nowhere. Although, that’s an option!
Eligible individuals living in, or considering living in, rural and suburban areas (we’ll get to what makes you eligible in the next section) can apply for the USDA Loan. It’s just that to receive the benefits of a USDA Loan, the home you’re looking to buy cannot be within a “major” metropolitan area. Some cities do qualify; they just need to have a small enough population not to be considered “major.”
If all this is new to you, here are the main takeaways:
- A USDA Loan is one of the best home financing programs available because it comes with zero down payment and 100% financing.
- Because USDA Loans are guaranteed against default, lenders — like Movement — can take more risks in providing beneficial rates and term conditions. This allows us to help more prospective homeowners get into a new home when other loan options have not moved forward.
Are you eligible for a USDA home loan?
Because USDA Loans are government-backed, there are some strict criteria you must meet in order to qualify:
- You are a US citizenship (or you have a legally permissible permanent residency in the USA)
- You have had at least 24 months of a stable income at the time of application
- You have an acceptable credit history with no accounts transferred to collections within 12 months prior to application
- You meet USDA income eligibility (More on that in a second, but know that income limits differ by the state and county and depend on the size of your family)
- Your family currently lacks sufficient housing
There’s no minimum credit score required to get a USDA Loan, but if your score is 640 or above, underwriting the loan will move quicker, so you can get approved faster.
Remote Workers Take Note: Since this program is intended to assist those who need it most — low to moderate-income homebuyers — you may be locked out. If you are a remote worker considering getting out of the city and relocating to a rural area for the fresh air (and larger home office), don’t move so fast: there is a maximum income cutoff. This means that the USDA Loan will not be open to you if your income is too high compared to the average income in the region you’re looking to buy in. Applicants must make no more than 115% of the median income in their area.
What homes are eligible for a USDA Loan?
There are also precise requirements about what type of homes you can consider with a USDA Loan. It needs to be in good shape so that your family can comfortably and safely live there — unless you are borrowing the money for a fixer-upper. Obviously, it also needs to be structurally sound enough to last throughout the terms of the mortgage. An approved appraiser will take a look at the structure to ensure that it’s in good shape. Specifications include:
- Accessibility – There should be no hazards blocking access to the home – so make sure you can access the property from a road.
- Structural stability
- Adequately sealed roofing with at least two years of life remaining.
- Operational heating and cooling systems.
- A working (or repairable) electrical system – no exposed wires!
- A working plumbing system with water pressure sufficient for waste removal.
- Functional exterior and interior doors.
- Functional windows that are free of cracks, leaks and mold.
Because USDA Loans are backed by the government, they aren’t just used to purchase a new home; you can also use them to refinance and renovate residential properties. After successfully applying for a USDA Loan, you can get funding for many home improvements or even buy a new property altogether.
Pros and cons of USDA Loans
The biggest positive of a USDA Loan is that they are incredibly affordable.
Pair the lack of a down payment requirement with the fact that it offers lower interest rates than most other loans and you have a win-win combination.
And since you can incorporate a portion of the closing costs into the loan itself, you may be able to avoid paying out of pocket for these expenses all at once before you get the keys at closing. This can reduce the stress of saving up a lot of money before you can even consider moving.
On the downside, USDA Loans incur a guarantee fee. This is a one-time, non-refundable financing fee the lender must pay for the loan guarantee. Of course, this fee is paid by the borrower. In 2021, this fee was 1.0% of the total loan amount, with an annual follow-up fee of 0.35% of the loan amount. Ask your lender if this fee can also be financed like the closing costs mentioned above. This would allow you to spread the cost over an extended period of time, in many cases over the life of the loan.
Ready to consider a USDA Loan?
The dream of homeownership is something that everyone should have to opportunity to experience. And with a mission to provide sanitary, safe and adequate housing to those of moderate and lower-income levels, USDA Loans help make that possibility a reality.
If you want to learn more, see if you qualify for the USDA program. Movement Mortgage has more than 1,200 loan officers who can answer your questions, help you determine if you’re qualified and make the home loan process easy.