USDA Rural Loan Basics
USDA rural mortgage financing loans provide a unique option for rural American. Along with VA financing, the USDA offers one of the only true 100% financing options.
By being geographically restricted to American “rural” areas and limited to borrowers with low to moderate incomes, the USDA mortgage program truly offers solutions to an underserved market.
So, what are the benefits for rural homeowners?
The major benefits are:
- 100% mortgage LTV based on the appraised value
- Zero down payment and no minimum contribution required
- Low mortgage insurance rates
- Flexible Credit Guidelines
- Property must be in a rural eligible location
Similar to FHA mortgages, the USDA uses homeowner-paid mortgage insurance premiums to keep the USDA home loan program funded. USDA rural mortgage financing has two qualification principles that are the focus of the underwriting guidelines – geography and income. Of course, some other standards must also be met.
Credit History-Credit history must indicate ability and willingness to meet obligations. Collections can be an issue, but can be overlooked if you have re-established your credit over the past 12 months.
Property Restrictions-USDA mortgages are primary residence only, no exceptions. You do not have to be a first time home buyer to use the USDA loan.
Income Requirements-Each county has specific income limits that determine USDA mortgage eligibility and your current household income must not exceed the limit set for that county. While the income limits are based on family size, they are not intended solely for low income families. Many low to moderate income families can also qualify.
Job History-A two year history of documentable income and employment is preferred. Exceptions might be granted for new college graduates, but outside of that you may have qualification issues if you have an unstable job history.
USDA Rural Credit Score-A 620 minimum credit score is usually the cutoff. The USDA likes a minimum of 12 months clean credit history.
USDA Property Requirements
The USDA – much like FHA – has a number of restrictions on the condition of the property.
- The foundation needs to be sound, containing no cracks, or moisture intrusion
- Walls, both interior and exterior, must not show structural fatigue or bowing
- Doors must be in good working condition, exhibiting no holes or functional defects
- All framing must be structurally sufficient
- Windows must function and lock properly; no broken windows
- Interior floors must not be heavily damaged, worn, or soiled
- Roofs must be free of leaks and expected to last for at least 5 additional years
- Cabinets and vanities must be present and functional
- Both electric and plumbing must be functioning
- HVAC systems must be in good working order
Frequently Asked Questions About USDA Rural Mortgage Loans
USDA does not have maximum loan amount. Borrowers qualify based on their debt to income ratios. The limit for DTI is generally 42%, but exceptions do exist for borrowers with strength in other areas of their mortgage application.
Add a few days to a week or more to the standard loan closing time for USDA rural loans. They have to be approved by the mortgage lender then sent to a local USDA office for final approval. The latter can take anywhere from a few days to a few weeks.
No, there are no restrictions that the USDA places on previous home ownership.
SDA loan approval criteria state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, then you would also be eligible to make an USDA loan application.
USDA Mortgages have no down-payment requirement.
Fixed-rate loans. All USDA loans are fixed-rate mortgages. In a fixed rate mortgage, your interest rate stays the same during the whole loan period, normally 30 years. The advantage of a fixed-rate mortgage is that you always know exactly how much your monthly payment will be, so you can plan for it.