USDA Loans

USDA loans are a zero-down-payment, government-backed home loan program that facilitates home ownership in rural areas. 

These mortgages are processed and guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, a section of the United States Department of Agriculture (USDA). They are offered to moderate and low-income earners who might otherwise not qualify for a conventional mortgage. 

The idea is to help low-income people residing in unsafe or unhealthy rural environments acquire an affordable home with plenty of safe space and modern utilities.

USDA Loans 101

The USDA mortgage loan has been available since 1949. It is a unique type of mortgage designed to encourage homeownership in various sections of the United States.  

Today, qualified applicants can either get a federal guarantee of this loan through private lenders such as commercial banks or receive a direct loan from the government. These mortgage types offer more lenient terms, including no down payment and low interest rates. They also come with some drawbacks, including location and income restrictions.  

Types of USDA Loans

There are three types of USDA loans catering to different buyers. Each loan comes with its own requirements, restrictions, and reasons for use. They include:

USDA Guaranteed Loans 

Officially known as Section 502 Guaranteed loans, these are the most common types of USDA loans. Generally, the USDA does not issue these loans. Instead, it guarantees them, allowing mortgage lenders, banks, credit unions, and other approved commercial lenders to offer 30-year-fixed-rate loans to eligible borrowers. 

Ideally, the government backs up to 90 percent of the loan to the lenders if a borrower fails to complete the mortgage payment. This reduces risks to the lender and provides more lenient conditions to the borrower.  

Besides purchasing a home in a USDA-eligible rural region, you must also meet the income requirement of no more than 115% of your region’s AMI (Area Median Income). Additionally, the borrower must be ready to occupy the home as their primary residence.  

While you do not have to pay for Private Mortgage Insurance (PMI), you must pay an upfront loan guarantee fee of 1%. You must also pay an annual fee of 0.35% of your loan balance. 

USDA Direct Loans

USDA direct loans are also known as Section 502 Direct Home Loans. The USDA offers these loans directly to very low-income households in rural areas who need adequate, affordable, and sanitary housing. 

The government offers funding for these loans with favorable conditions, such as long repayment periods of 33 to 38 years for very low-income borrowers. The interest rates are fixed, currently standing at 4.875% as of August 1, 2024.  However, the rates can go as low as 1% for borrowers who qualify for subsidies. 

USDA Direct loans help low-income borrowers to buy, build, or renovate homes in USDA-approved rural areas. Creditworthiness, location in USDA-approved regions, income, and inability to obtain loans from conventional lenders are some of the factors that affect eligibility. 

Usually, the USDA offers direct loans for rural homes whose market value is lower than the area’s loan limit. However, note that such conditions might vary based on region. For instance, the loan limit can be up to $700,000 or more in pricey real market regions such as Hawaii and California, though the majority of rural areas have loan limits of approximately $330,000. 

Home Improvement Loans and Grants

These loans are also known as Section 504 home repairs. Unlike guaranteed and direct loans, home improvement loans help low-income individuals repair or improve their rural homes. 

However, you can only borrow up to $40000, which can only be used for home repairs, rehab, or renovation. On the other hand, grants are issued to very low-income earners (usually older than 62 years) to help them repair and remove hazards in their homes. USDA grants are capped at $10,000. 

Some of the eligible home repairs include:

• Installation or repair of water wells and septic system
• Making the home safe and accessible to persons with disability
• Modernization- Bathrooms, kitchens, exterior siding, interior floor cover, etc
• Eliminating safety hazards
• Structural alterations or additions
• Installation of weatherization or energy conservation feature

USDA Loans Eligibility Criteria

To be eligible for a USDA home loan, a borrower must meet several requirements, which might vary depending on the type of loan you are applying for. However, most requirements apply to guaranteed, direct, and home improvement loans. These include:

• Citizenship: The borrower must be a US citizen, non-citizen national, or qualified alien. You must also have a valid Social Security Number. 
• Income Limits: Your household income must not exceed 15% of the AMI (Area Median Income)
• Creditworthiness: Borrowers seeking guaranteed USDA loans must have a credit score of 640, while direct loans might have more lenient requirements. 
• Debt to Income Ratio: Your monthly loan repayment, including the principal, interest, taxes, and insurance, must not exceed 29% of your monthly income. Other monthly debt repayments, including prospective mortgage payments, must not exceed 41% of your income. 
• Stable Income: Borrowers must demonstrate a stable and reliable income at least 24 months before the loan application. 
• Approved USDA rural area: According to the USDA, an eligible rural area has a population not exceeding 20,000 residents. 
• Unable to acquire conventional loans: You must be unable to obtain a loan from other resources on basic terms and conditions to qualify for a USDA loan.
• Meets Safety Requirements and Standards: Your property of interest must meet the USDA minimum requirement for hygiene, structural integrity, access to services and utilities, and overall safety.
• Single-Family Residence: USDA is only designed for primary residences, not second homes or investment properties. 
• You should not be debarred or suspended from participating in any federal program.
• You must be without safe, sanitary, and decent housing. 

Alternatives to USDA Loans

While a USDA home improvement loan might be a great option for homeowners looking to improve their homes, it might not be enough to tackle their entire wish list. This is because the loan amount you qualify for is based on the current value of your home and not its after-renovation value. That is where RenoFi comes in. Instead of paying attention to the home’s current value, RenoFi takes a forward-thinking approach and focuses on the after-renovation value of the home.

Let’s say your current home value is $500,000, with an outstanding mortgage balance of $400,000. You want to renovate your home with the expectation that its value will increase to about $640,000. Your loan-to-value ratio currently stands at 80%, meaning that you cannot get a USDA loan to fund your renovations. With a RenoFi loan, however, you can get 90%-150% based on the after-renovation value. 

Based on the example above, USDA home renovation loans focus solely on the current value of your property rather than the after renovations value. On the other hand, RenoFi allows you to borrow up to $176000 based on the after-renovation value of your home. 

That said, if you are a homeowner considering a home renovation project, RenoFI is the most viable option to finance your project. Do not hesitate to explore and learn more about the available options.

USDA Loan Eligibility Map

The USDA loan eligibility map is a valuable and reliable online resource for prospective borrowers. It is also one of the easiest ways to identify a property in a USDA-eligible region. 

Generally, the green areas on the map represent cities and towns with a population of 20,000 people or less. On the other hand, the black-shaded areas represent regions with more than 20,000 people, making them ineligible.

Potential borrowers can also enter their specific addresses to determine whether they qualify for direct or guaranteed USDA loans. Besides exploring the USDA loan eligibility map, you should also reach out to a USDA-approved lender to get more specific, accurate, and up-to-date information. 

How to Get the Best USDA Mortgage Rates

Improving your financial situation will help you qualify and secure the best USDA loan rates. You can do that by:

• Improving your credit score: Paying your loans on time and ensuring your credit reports have no errors can help you boost your credit score. This can help you qualify for the best USDA home loans.
• Reducing your debt-to-income ratio: Strive to reduce your existing debt by paying off your high-interest loans. This demonstrates your capacity and willingness to manage your USDA mortgage loan and make payments on time.
• Making a down payment: be sure to shop around, analyze, and compare various USDA loan terms, interest rates, closing costs, and fees from multiple USDA-approved participating lenders. This can save you a lot of money and frustration from making the wrong choice. If you are a first-time home buyer, you might land some pretty good deals than USDA loans. So, be sure to explore all the available options. 

How to Apply for USDA Home Loans

Qualifying for a USDA mortgage loan is one of the best ways to finance a home, especially if you desire to settle in a rural, laid-back area. The loan application process is quite similar to other mortgage loans. 

Shop around, compare lenders and interest rates, complete the application, present your financial documents, wait for your loan approval, and choose a closing date. 

The application process is similar to other home loans: compare rates, choose a lender, complete an application, provide financial documents, await approval, and set a closing day. However, applying for a USDA loan might have slight variations. 

Here is a step-by-step guide to applying for this type of mortgage:

Confirm Your USDA Eligibility

Before starting your application process, you must check whether you are eligible for a USDA loan. Some of these include:

• A debt-to-income ratio not lower than 41%, with a little flexibility based on the borrower’s situation
• A minimum credit score of 640
• A property located in a USDA-approved region
• Income limitations that might vary by household size and location

Present Your Financial Documentation

Prospective borrowers must present various financial documentation to prove their eligibility. These include:

• Employment verification
• Personal identification documents such as passport or driver’s license
• Proof of income eligibility, such as tax returns and pay stubs
• Credit history report

Pre-Qualification

Get in touch with a USDA-approved lender to get pre-approved for a USDA home loan. The lender will evaluate your financial position and give you an estimate of the loan amount you can get. This step shows sellers that you are committed and gives you a better idea of your budget.

Property Search

Once you are pre-approved, you can start exploring for houses that meet the USDA criteria. Remember, these homes must be located in USDA-eligible rural areas. You might want to partner with a real estate expert who has experience in these types of loans.

USDA Home Loan Application

Once you find the right home, it’s finally time to apply for the USDA loan. Your approved lender will help you through the process, which might include a deeper evaluation of your financial position and submission of all the required documents. 

Appraisal and Inspection

Your lender will organize for property appraisal to ensure that the home meets all the USDA criteria. An inspection might help you identify any current or potential issues with the property.

Loan Approval and Closing

Once your documentation is approved and the appraisal and inspection are complete, you will proceed to the loan approval stage. If your loan is approved, you will finally get to the closing state, where all paperwork is completed and signed. Finally, you will officially be granted your USDA home loan. You can now move into your new, safe, sanitary, and secure home.

RenoFi is the smartest way to finance your home renovation project and tackle everything on your wish list. Unlike traditional loans, it uses the after-renovation value rather than the current value, ensuring the most borrowing power at the most competitive rates. 

We have multiple payment terms available based on your financial position, among other factors. If you are ready to start renovations and upgrade your home, contact us today to learn more about how we can help.