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USDA Loans: What You Need To Know

USDA Loans: What You Need To Know

What is a USDA Loan?

A USDA loan is a type of mortgage loan guaranteed by the U.S. Department of Agriculture. It is a competitively priced mortgage option aimed at making homeownership more attainable for low-income individuals residing in designated rural areas. Similar to how the Department of Veterans Affairs supports VA loans for eligible veterans and their families, the U.S. Department of Agriculture backs USDA loans. This government backing enables mortgage lenders to offer lower interest rates, often significantly lower than conventional loans.

How Do I Qualify for a USDA Loan?

To be considered for a USDA construction loan or to qualify for a USDA loan for a home purchase, prospective buyers must meet specific eligibility criteria. These requirements include:

Residency. Applicants must be U.S. residents, noncitizen nationals, or permanent resident aliens.

Location. Homes financed by USDA loans must be situated in eligible rural areas. You can verify a property’s eligibility by using the USDA’s eligibility site and consulting a USDA representative to ensure accuracy.

Income. USDA loans are intended for families with demonstrated economic need, meaning their adjusted gross income cannot exceed 115% of the median income in the area. Stability of income and the ability to make mortgage payments are also vital factors in the approval process. Lenders typically look for a debt-to-income (DTI) ratio of 43% or lower.

Credit Score. While most lenders require a credit score of 640 or higher, there may still be options for those with lower scores. It’s advisable to speak with a lender to explore your possibilities.

What are the Benefits of USDA Loans?

USDA loans offer several advantages over other types of loans.

No Down Payment. One of the most significant benefits of USDA loans is that they offer 100% financing, meaning you can purchase a home without making a down payment. This can be especially beneficial for first-time homebuyers or those with limited savings.

Competitive Interest Rates. USDA loans often come with lower interest rates compared to conventional mortgages. This can result in lower monthly mortgage payments and substantial savings over the life of the loan.

Lower Mortgage Insurance Costs. Unlike many other loan types, USDA loans have lower mortgage insurance premiums. This can further reduce your monthly housing expenses.

Flexible Credit Requirements. While a good credit score is desirable, USDA loans are more lenient when it comes to credit qualifications. Borrowers with less-than-perfect credit histories may still qualify for these loans.

Rural and Suburban Eligibility. USDA loans are not limited to remote rural areas; they also cover certain suburban neighborhoods. The USDA’s eligibility map can help you determine if your desired location qualifies.

Check out USDA-eligible properties in Greenville, SC.

Stable, Fixed-Rate Mortgages. USDA loans typically offer fixed interest rates, ensuring that your monthly mortgage payment remains consistent throughout the life of the loan. This stability can help with budgeting and financial planning.

No Prepayment Penalties. USDA loans do not impose penalties for prepaying your mortgage. This means you can make extra payments or pay off your loan early without incurring additional costs.

Home Improvement Financing. In addition to home purchase loans, USDA offers home improvement loans to help homeowners make necessary repairs and upgrades to their properties.

Support for Low-Income Families. USDA loans are designed to assist low- to moderate-income families in achieving homeownership. They have income limits that vary by location, allowing individuals and families with modest incomes to become homeowners.

Government Backing. USDA loans are backed by the U.S. Department of Agriculture, providing a level of security to both borrowers and lenders. This government support encourages lenders to offer more favorable terms to eligible applicants.

What is the income limit for USDA Loan?

The income limits for USDA loans vary depending on the location of the property and the number of people in the household. To provide a general idea, USDA sets income limits as a percentage of the area’s median income. Typically, the income limit is set at 115% of the median income for the area.

For example, in general for 2023, South Carolina households with 1-4 members = max $110,650 gross income per year. Some counties can be even higher. Larger households with 5+ members can even go higher, up to $151,350. USDA also allows deductions for child care, elderly, disabilities, etc.

However, it’s important to note that these limits can change annually and can also differ based on factors such as the size of the household and the specific location of the property. Therefore, it’s recommended to check the most up-to-date income limits on the USDA’s official website or consult with a USDA-approved lender to determine whether you meet the income eligibility requirements for a USDA loan in your area.

What Credit Score is Needed to Apply for a USDA Loan?

To apply for a USDA loan, lenders typically look for a minimum credit score of 640 or higher. However, it’s essential to understand that credit score requirements can vary among lenders, and some may be willing to work with borrowers who have slightly lower scores.

What is a USDA Guarantee Fee?

A USDA Guarantee Fee is a fee associated with USDA loans, and it serves a specific purpose within the program. This fee is a cost you are required to pay as part of obtaining a USDA loan, and it helps support the USDA loan program itself.

The Guarantee Fee consists of both an upfront fee and an annual fee. The upfront fee is typically a one-time payment made at the beginning of the loan, while the annual fee is paid each year as part of your ongoing mortgage payments.

The USDA Loan fees for FY 2023 are an upfront guarantee fee of 1.0% of the loan amount and an annual fee of 0.35% of the loan amount. Assume you’re buying a house for $160,000 with a $5,000 down payment. The USDA financing fee would be calculated as 1% of $165,000, or $1,650. You can pay the USDA funding fee at closing or roll it into your mortgage.

How to Apply for a USDA Loan?

To apply for a USDA loan, start by finding an approved lender and checking your eligibility based on income and property location. Gather required documents, pre-qualify, and complete the loan application. The lender will assess your credit, underwrite the loan, and conduct a property appraisal.

Upon approval, proceed to the closing process, sign documents, and address any closing costs. Your closing costs may range from 3% to 6% of the loan’s value. There are various ways to pay closing expenses. You might be able to wrap the fees into your loan amount or If the seller is motivated, they may agree to cover some or all of the costs.

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