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USDA Home Loans and Guidelines on Rural Homes

If you are interested in owning your own home and you think that you cannot qualify, you should consider the USDA home loan program. This is a program that is easier to qualify for than you might think, and very low down payment options are available and the rates on USDA home loans is usually very competitive. Below is more information about USDA guidelines on rural home loans. This just might be the program to get you into your own home with a low down payment and low interest rate! Read more about the pros and cons of USDA home loan programs below.

Overview

USDA loans are mortgages that are guaranteed by the US Department of Agriculture as part of the Rural Development Guaranteed Housing Loan program. USDA mortgages can be obtained by people with below average credit, and 100% financing is available for many borrowers. Interest rates are also very competitive. The purpose of the USDA Home Loan program is to encourage home ownership in rural areas of the country. It is reported that as much as 97% of the US is in territory that may be eligible for USDA home loans. While the home must be in a 'rural' area, USDA is quite liberal in determining what this means.

Below are important guidelines and an explanation for USDA loan requirements you need to understand:

#1 USDA Home Loans Require Mortgage Insurance

This program is similar to the Federal Housing Authority's mortgage program. By that we mean that the loan is guaranteed by the US government. So, lenders are more likely to lend to borrowers with low down payments and average credit. In exchange for these benefits, you will need to pay mortgage insurance each month. Read more about the single home loan standards by the Department of U.S. Agriculture.

Mortgage insurance rates on USDA Home Loans are:

  • For purchases, 2.75% upfront fee paid at closing, based on the loan size
  • For refinances, 2.75% upfront fee paid at closing, based on the loan size
  • For all loans, 0.50% annual fee, based on the remaining principal balance

Note that as of October 2016, USDA fees will be reduced to 1% paid at closing, and .35% paid each year. This is considerably lower than mortgage insurance you must pay for an FHA loan. You may finance the upfront mortgage insurance premium into the loan.

#2 No Minimum Credit Score Required

The USDA program is to encourage home ownership in rural areas. For that reason, there is no minimum credit score required for this program. However, many lenders will consider 640 FICO scores as the lowest possible score. If your score is lower than that, you will need to explain why your score is so low, and you will probably need documentation. If you do not have any credit history established, the lender may accept alternative ways to prove that you have a reliable payment history, such as rent and utility payments.

#3 Self-Employed Income Ok

Any self-employed person with an established record of profits is eligible for the program. You will generally need to show two years of federal tax returns.

#4 Recent Unemployment OK

If you just recently went back to work and have steady W-2 income, you are eligible for this program. No job history is needed. If you have less than two years in your job, you may not be able to use any bonus income to qualify for the loan.

#5 No Loan Limits

There is no maximum limit on the loan you get through the USDA program. So, after you fill out the loan application, how much you will be approved for will be determined by the following:

  • Debt to income ratio
  • FICO score
  • Your assets and monthly income
  • Rental or mortgage payment history

#6 USDA Loans Can Be Used for Repairs

The USDA program is supposed to be used most often for existing homes. So, the program can be used to make eligible repairs on a home. This might include putting in new windows and appliances, replacing the roof, putting broadband Internet service into the residence, and putting the home on city water.

#7 Income Limits on USDA Loans

While there is no limit on the size of the loan you can get, there is a limit on how much money you can make to be eligible for a loan. The limit according to FDA is that your income should not be more than 115% of the median income for the area. Obtaining a USDA loan for a rural home is actually quite easy given the flexible lending standards for getting a USDA-backed mortgage. It helps if you have a regular, long term income and at least average credit, but the lending guidelines are quite flexible. If you did not have a job until recently, you still can qualify for this program.

USDA may want to see that you have more cash reserves, or it may limit the size of loan you can get. But overall, the USDA program is an excellent way to get a 100% financing loan.

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