Little-Known Home Loan Program Makes for Streamlined Financing
First things first: USDA stands for United States Department of Agriculture.
While this government entity might not be what first comes to mind when you think about taking out a mortgage, it’s actually a pretty large loan provider that – as part of an agency called USDA Rural Development – services many Americans who wish to purchase a home under a group of programs called Rural Housing Service. The programs cover both single-family and multi-family housing.
The loan is a great deal for lower- to moderate-income families, often first-time homebuyers, looking for a less expensive option for a new place to live.
The loan’s funds can be used in many ways, like purchasing an existing home or even buying a lot in a rural area on which to build a new home.
What are the Perks of a USDA Home Loan?
The USDA home loan is a great deal! Not only that, but it also comes with many different perks and benefits.
Here are just a few of the most enticing qualities:
• No Down Payment
This is one of the only loans that requires no down payment, making it a very attractive option for lower-income families.
• Lower-Than-Market Interest Rate
This means that you pay less over the lifetime of the loan since the interest rate isn’t as high – truly a great deal.
• Low Monthly Private Mortgage Insurance (PMI)
It isn’t as expensive to insure a mortgage when you take it out through the United States Department of Agriculture.
• Flexible Credit Guidelines
If your credit score it too low to secure more traditional ways of financing your mortgage, then it’s possible that you could still have USDA eligibility.
What Makes a USDA Home Loan Stand Out from Other Loans?
One of the coolest features of securing a rural development loan is that you don’t even need to buy a house to use the loan!
Here’s what we mean:
The mission of any loans given out by the United States Department of Agriculture is to stimulate rural economies by encouraging more people to move there to live and do business.
Because these areas might be sparsely populated in the first place, it follows that there might not be enough homes to choose from for loan applicants to purchase. Or even if there are homes on the market, they could be too small, in disrepair, or simply not what you (as the potential homeowner!) want to buy. So . . .
You Can Build Your Own Home
The USDA lets recipients of their home loans use the funds to build a home on land in an approved area. How cool is that?
This loan is known as a single-close loan and combines a construction loan (aka interim financing) with a traditional 30-year fixed USDA loan.
To get the best deal, you should always partner with your USDA loan officer to work on the details, but here is some general information about building a home with a USDA loan:
Your contractor must have
• At least two years of experience building single-family homes
• Construction or contractor license
• Evidence of a minimum of $500,000 in commercial liability insurance
• A satisfactory credit history
• A clear background check, proving no past felonies
Your home must
• Meet current IECC codes for thermal standards
• Have a new construction warranty from the builder
• Have any leftover money from the construction put toward the loan principle
• Be a single-family home, manufactured home, or eligible condominium
Top 5 Tips for Securing a USDA Home Loan
Here are the best tips and tricks to keep in mind as you begin the process of applying for (or simply learning more about!) a United States Department of Agriculture rural development loan.
1. Have a Plan
The obvious first (and most important!) step for securing a USDA housing loan is to go into the process with a good plan. Before you do anything else, take a step back and really consider your goals and how this particular housing program will really help you to fulfill them.
Reading this article is a good first step!
This is because while there are always going to be plenty of experts to talk to about the finer points of your plan, you won’t truly know what kinds of questions to ask about these rural development loans and how they apply to you until you do your research.
2. Start Rural
The great things about the USDA loan program is that land in nearly 97% of the country is eligible for the loan and more places are constantly being added to the list of eligible areas.
This is due to the census. Every 10 years, once the United States Census Bureau is finished with their counting, the USDA comes in behind them and uses the new data to identify these new eligible areas.
Rural homesteads like this are the main – but by no means the only – properties USDA housing loans were designed to help (photo by John Reed on Unsplash).
If you want to move to an area that seems pretty rural (with very few homes around already), then it’s pretty likely you’ll be all set, but you can never know for sure without talking to an official lender.
However, to get a better idea of the options available for you, the United States Department of Agriculture has even put together this handy map to help you with your home search. While this map won’t answer the question, “how do I find a list of existing approved USDA houses for sale?” It will help you better understand eligible areas.
3. Partner with a Lender
If you are thinking about applying for a USDA rural development loan, then you’ll need to do so with the help of an authorized loan officer.
Many banks and other mortgage lending agencies have someone on staff who is familiar with the program. This officer will be able to help guide you seamlessly through the application and approval process.
When searching for this lender, there are a few questions you should ask to ensure you get the best possible service.
Always be sure to ask:
• How much of your business comes from USDA loans?
• Do you offer special USDA loan training for loan officers?
Remember: just because a loan officer has a “specialty” in USDA loans, it doesn’t mean that these loans are more intricate or difficult than other types of mortgages.
They are just different – not harder, so don’t let that scare you away from the program.
4. Examine the Size of your Family
As your loan officer will tell you, the size of your family has a pretty big impact on your eligibility for a USDA loan as well as the amount of money that you will be able to receive.
However, it is important to keep in mind that the size of your family (at least for loan purposes) only really depends on how many dependents you have – not your actual number of children. So if you have a few grown children who are out of the house, then you don’t need to count them.
The cut off for most loans are different prices for families of one to four people versus five to eight.
5. Look at Your Income
The final tip for securing a USDA loan is to examine your income, as your income and the amount of people in your home directly correlates to loan eligibility.
Although the exact income requirements change each year, typically families with four or fewer people are limited to approximately $80,000, while families with more than four may make up to approximately $100,000.
Be sure to touch base with your USDA loan officer for the exact figures of the year that you apply.
Verifying your income for this loan program works much like any other loan. You will need paystubs covering the most recent 30-day period and the last two years of W2 forms.
If you are self-employed, then you’ll need the last two years of income tax returns along with a year-to-date profit and loss statement.
Short History of the USDA Home Loan
Way back in 1935, the United States Department of Agriculture created the program to help mitigate the negative impact of the Great Depression on our country’s most rural areas.
The program’s original name was the Resettlement Administration, and it was created by Franklin D. Roosevelt's Executive Order No. 7027 under the authority of the Emergency Relief Appropriation Act of 1935. Its main purpose was to stimulate smaller economies by populating rural areas and helping consumers to buy and finance homes during the worst years of the Depression. However. the RA lasted only two years after coming under much harsh criticism.
Vintage homes on rural land, like this 5-bedroom, 3-bath farmhouse in the Craftsman style home, were some of the very properties that the Resettlement Administration was created to help (Plan #115-1434).
Farmers still needed assistance, and Congress pased the Bankhead-Jones Farm Tenancy Act in 1937, which President Roosevelt signed into law on July 22, 1937. Later that year, in September, Secretary of Agriculture Henry Wallace created the Farm Security Administration (FSA) as successor to the Resettlement Administration. The FSA lasted until 1946.
The Farmers Home Administration (FmHA) then replaced the FSA and operated in one form or another until 2006, when it was terminated. Its housing and community programs were subsequently transferred to a newly formed agency called USDA Rural Development, which continues to this day.
Whether you're purchasing property for the first time or simply looking for a more affordable option, a United States Department of Agriculture Loan is a simple, accessible lending option that can truly jumpstart your life as a homeowner.