What is a USDA Loan?

What is a USDA Loan


Summary: A USDA loan is a zero-down payment home loan mortgage available to rural homebuyers. USDA loans are backed by the United States Department of Agriculture and are designed to improve the quality of life and make homeownership possible in rural America. USDA loans offer three distinct programs—USDA Direct Loans, USDA Loan Guarantee, and Single-Family Housing Repair Loans and Grants—which offer different needs for diverse applicants.

A USDA loan is a zero-down payment home loan mortgage available to rural homebuyers. Areas with a population of 20,000 or less—35,000 or less in special cases—qualify as rural areas. USDA loans are backed by the United States Department of Agriculture and are designed to improve the quality of life and make homeownership possible in rural America.

Who Qualifies?

USDA loan applicants can finance 100% of their housing loan. The loan program focuses on applicants who:

  • Do not have decent, safe, or sanitary homes
  • Do not qualify for traditional home loan options
  • Have adjusted incomes at or below the low-income limit within their area

Three Main Programs

USDA loans offer three distinct programs for their applicants:

  1. USDA Direct Loans (Section 502 Direct Loans)
    • Program is for qualifying low-income borrowers
    • If borrowers fail to repay the loan, the program will pay 90% of the loan to mortgage lenders
  2. USDA Loan Guarantee
    • Offers low interest rates
    • Small down payment options
    • Issued by participating mortgage lenders—contact your mortgage lender to inquire about its availability
  3. Single Family Housing Repair Loans & Grants (Section 504 Home Repair Program)
    • To help make repairs or improvements to a home
    • Available to applicants with low income—contact your mortgage lender to learn their specific income requirements

Requirements

Below are a few general qualifying requirements for a USDA home loan mortgage.

  • A low-income applicant
  • U.S citizen or permanent resident
  • Front-end DTI ratio (housing expenses) capped at 34%
    • Back-end DTI ratio (all minimum monthly debt) of 43%
      • This can be altered depending on your mortgage lender
  • Dependable income
  • A minimum credit score of 620—contact your mortgage lenders for their specific qualifications
  • A home appraisal
  • Loan options that are fixed rate loans
  • Guarantee Fee
  • USDA mortgage insurance

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