Financial Education

What is a USDA loan? Find out if you are eligible

If you are interested in buying rural property or have been pre-approved for a mortgage, this guide should help you understand what a USDA loan is! Find out how it can benefit your purchasing plans.

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USDA loans: what are they and how can you get one?

Conceptual business illustration with the words usda home loan
In this detailed article, learn what a USDA loan is! Source: Adobe Stock

If you’re looking for a mortgage with more flexible eligibility requirements, you may have come across the term USDA loan. But what is a USDA loan?

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And how to qualify for it? Well, we are here to help answer your questions! So keep reading to find out if the USDA is the right home loan option for you!

What is a USDA loan and how does it work?

A USDA loan is a mortgage backed by the U.S. Department of Agriculture. It offers competitive prices and lowers interest rates compared to other lenders.

It was designed for moderate-to-low-income homebuyers who live in designated rural areas. Therefore, borrowers can put down less or no money and still finance a home.

Currently, there are three main USDA mortgage programs. One is USDA Direct loans which allow low-income borrowers to qualify for interest rates as low as 1%.

Secondly, we have USDA Loan guarantees. In this type, homebuyers can qualify for lower interest rates and a minimum down payment as low as 0%.

Lastly, there are the USDA Home improvement loans, destined for qualifying homeowners who need the loans to make home repairs and improvements on their property.

USDA has only fixed-rate mortgages available for borrowers.

Since this type of home loan is issued by the government, the minimum borrowing requirements are different from the ones on a conventional loan.

Below, let’s check some details of a USDA loan so you can make an informed decision when choosing your home loan!

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Interest rates

As previously said, USDA loans are made for lower and moderate-income borrowers, offering lower requirements.

When it comes to interest rates, USDA mortgages have only fixed-rate loans. There are no adjustable rates available.

Additionally, mortgages backed by the U.S. Department of Agriculture tend to be 0.50 percent more affordable than other types of mortgages. This can make all the difference in your finances.

Terms of repayment

USDA mortgage loans have only 30-year fixed rates available for their customers. They offer a longer repayment time to help the borrower pay their loan in the long term.

So if you are looking for a 15-year mortgage, a USDA loan is not the right choice!

Minimum credit score

Most lenders will require a minimum credit score of 580.

However, they usually consider multiple factors; consequently, you might still qualify for a USDA mortgage if you have a lower credit score.

Benefits of a USDA loan

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Find out the benefits of a USDA loan! Source: Adobe Stock

Mortgages backed by the U.S. Department of Agriculture offer multiple benefits for its borrowers.

It might not work for everyone, but it delivers more flexible eligibility requirements and features!

Also, if you don’t want or can’t make a down payment, don’t worry! You can buy a home without putting money down.

Furthermore, you can easily refinance your home loan if the rates drop. A USDA loan allows the seller to pay the closing costs and charges no pre-payment penalty.

Customers can predict their monthly mortgage payments and organize their finances with fixed interest rates.

And with this type of loan, you can purchase, refinance or build a home with the loan amount.

Lastly, borrowers can also use their loan finance repair and closing costs.

So as you can see, USDA loans can be a handful of resources, especially for a homebuyer with lower purchasing power.

Drawbacks of a USDA loan

USDA loans are a great way to get the money you need to finance your dream property. Nevertheless, before applying, you must consider the drawbacks of this home loan too.

For example, mortgage loans backed by the U.S. Department of Agriculture can only be used for purchases in eligible rural areas.

Moreover, since it offers lower o no down payment, customers will have to pay private mortgage insurance (PMI).

USDA is designed for borrowers with low-to-moderate earnings. As a result, there are income limits, and applicants must meet this requirement.

Lastly, this loan can only be used for single-family and owner-occupied!

What is the difference between a USDA loan and an FHA loan?

House in the middle of a green field
Keep reading and learn everything you need about USDA loans! Source: Adobe Stock

USDA and FHA mortgages are both issued by the government. However, there are some differences between these two types of mortgages.

One of the main differences is that while USDA loans require that the property is in a rural area, FHA mortgages require no specific locations.

Additionally, FHA loans require a minimum down payment of 3.5% of the home price. On the other hand, USDA can cover 100% of the property purchase.

And while USDA limits the applicant’s income requirements, FHA loans don’t!

Is it hard to get approved for a USDA loan?

The answer is no! As said, USDA loans are made to help people with lower income to achieve homeownership.

As a result, it is not hard to get approved. However, new applicants must meet some requirements listed on the USDA website.

By doing that, you can increase your chances of getting approved for a USDA home loan.

Who is eligible for a USDA loan and how to apply for one?

To be eligible for a USDA loan, you must follow some U.S. Department of Agriculture guidelines.

Therefore, borrowers must be legal permanent U.S. residents and prove their creditworthiness through their credit history!

Also, applicants must maintain a dependable income and have a household income of 115% or lower than the area’s median income.

You can only borrow to purchase a primary residence in an eligible rural area.

When it comes to how to apply for a USDA loan, it is simple! First, shop around and find a USDA-approved lender to submit your application.

Currently, most borrowers submit it online. As a result, you can apply through the lender’s website.

They usually require that customers provide their personal, financial, and employment information.

This way, they can verify the borrower’s identity and see available options.

In addition, borrowers can submit the requested documents online, and some lenders allow them to e-sign the closing documents.

Lastly, homebuyers can even track their application status online! As you can see, it is a simple and fast process!

Now that we answered all your questions about USDA loans, it is to work! You’re one step close to buying your dream home!

But remember to do your research before applying for a lender!

Well, we have a useful article to help you with that! The following post will explain the types of mortgage loans so that you can have even more options! Great, right? So let’s get started!

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About the author  /  Beatriz Vieira

Beatriz Vieira is a producer and copywriter who is part of the finance writer team in this portal. She has a degree in Journalism and aims to improve her bilingual writing skills. Her subjects of most significant interest are culture, finances, and self-development.

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