What is a USDA Loan?
Officially known as the Section 502 Single Family Housing Guaranteed Loan Program, the USDA loan is a $0 down mortgage option available to rural and suburban homebuyers in the United States. USDA loans are issued by qualified lenders and guaranteed by the U.S. Department of Agriculture (USDA).
The USDA loan’s purpose is to provide low-to-moderate income households the opportunity to achieve the dream of homeownership in eligible rural areas, and does so by guaranteeing each USDA loan against default. This guarantee allows for amazing benefits, such as zero down payment, low rates and lenient credit requirements.
How USDA Loans Work
The USDA does not finance single-family guaranteed loans, but guarantees the loan against default. Because of the USDA loan guarantee, lenders can take on more risk and offer eligible rural homebuyers advantageous rates and terms.
This means USDA loans work like other major mortgage options, but have unique guidelines and requirements that are best handled by a lender with USDA loan experience. Interested borrowers should first start with a lender to determine if they are eligible for a USDA loan.
The USDA has its own guidelines and requirements, including eligibility requirements for both the homeowner and property. Moreover, lenders may have their own internal guidelines and requirements in addition to those set by the USDA.
How to get a USDA Loan
Once you decide to purchase a home with a USDA loan, you will complete the following five steps:
- Find a lender and get preapproved: The USDA doesn’t make single-family guaranteed loans, so prospective borrowers should start with a USDA-approved lender. Once preapproved with your lender, you will receive a preapproval letter that shows how much you can afford and lets real estate agents and home sellers know any offer placed on a home is serious.
- Find a USDA-approved home: USDA loans are specifically for homes in rural areas. Your real estate agent or lender can help you determine what homes are eligible for the USDA loan.
- Purchase agreement and appraisal: Once your lender receives a signed purchase agreement, they will order the USDA loan appraisal. USDA loan appraisals ensure the home meets USDA guidelines and that the price you’ve agreed to pay corresponds with the current value. USDA appraisals differ from home inspections and are performed by a licensed, independent third-party appraiser.
- USDA loan processing: Here, your lender reviews the USDA appraisal and all credit, income and asset documentation. The lender then decides whether the loan should be funded.
- Closing on the home: After your underwriter approves your loan file, all that is left to do is close on your home. At your loan closing, you sign all loan documents in order to transfer ownership of the property.
Qualifying for a USDA Loan
To qualify for a USDA loan, borrowers must meet credit and income criteria set forth by the lender and the USDA.
At a minimum, the USDA requires:
- U.S. citizenship or permanent residency
- Dependable income, typically two consecutive years
- The ability and willingness to repay the mortgage – generally no late payments or collections 12 months prior to the application
- An acceptable debt ratio, which can vary by lender and other factors
- The homebuyer not make more than 115% of the area median income.
To help determine if you are eligible, see our next section on USDA home loan eligibility.
USDA Loan Property Eligibility
USDA loans are available to homebuyers wishing to purchase in what the USDA considers a rural area, although some suburban areas may be eligible as well.
Additionally, USDA loans are only available to homebuyers wishing to purchase a single-family home that will be their primary residence. Homes with acreage may be eligible, if the site size is typical for the area and not used principally for income-producing purposes. Income-producing property and vacation homes do not qualify.
The USDA Guaranteed Home loan has assisted thousands of homeowners en route to their dream home and continues to be one of the most advantageous programs on the market today.