The US Department of Agriculture provides loans to qualified residents for the purchase or repair of qualifying properties. The program is designed to support rural economies but the definition of “rural” includes many suburban areas.
In most cases, the USDA does not actually lend the money. It provides loan guarantees that enable lenders to offer better terms than they otherwise could. Lenders servicing USDA loans must comply with USDA standards and lending criteria and may have extra requirements of their own.
USDA loans may have low or no down payments and very low interest rates. If you qualify for a USDA loan and you are shopping for a home or home repair loan in an area that qualifies for the program it’s a great option to consider.
What Areas are Eligible for USDA Loans?
USDA loans are intended to serve rural areas. The USDA’s definition of “rural” is quite liberal and includes many suburban areas. Urban centers are not eligible, but homes in approximately 97% of the land area of the US are eligible for USDA loans.
You can check eligible areas using the USDA’s Eligibility Site.
USDA loans don’t require homeowner counseling, and you do not have to be a farmer or involved in agriculture in any way to qualify for a USDA loan.
The Single-Family Rural Home Loan Program (Section 502)
This is USDA’s largest loan program. It provides up to 100% financing for qualified applicants to buy, construct, renovate or relocate a single-family home in a qualified area.
Section 502 includes two types of loans. Section 502 Direct Loans serve very low to low-income borrowers and Section 502 Guaranteed Loans serve low to moderate-income buyers.
Section 502 Direct Loans
These loans come directly from the USDA and serve low and very low-income borrowers that wish to purchase or repair a home. They have low or no down payments and interest rates as low as 1% for borrowers who qualify for payment assistance. Borrowers have up to 38 years to pay the loan back.
These loans have several requirements:
- The borrower’s adjusted income must be at or below the low-income limit for the area where the home is located.
- The borrower must personally occupy the home. USDA loans can’t be used for rental, investment, or vacation properties.
- The borrower must be a US citizen, non-citizen national, or qualified alien.
- The borrower must show the ability and will to pay back the loan.
- The borrower must not currently have adequate, safe, and sanitary housing.
- The borrower must have the legal ability to take on a loan.
- The borrower must not be suspended or banned from federal program participation.
The property to be bought or repaired must also meet some qualifications:
- The home’s area must be 2,000 square feet or less.
- The home must have a market value below the area’s loan limit.
- Homes with in-ground swimming pools are not eligible.
- The home must not be designed for income-producing activities.
The borrowed funds can be used to buy, build, renovate or move a residence, or to buy and prepare a site. Very low-income borrowers may be eligible for payment assistance, an additional subsidy that reduces the loan’s interest rate and initial payments.
Section 502 Guaranteed Loans
Section 502 Guaranteed Loans come from private lenders but are guaranteed by the USDA. These loans still have no or low down payments, but the interest rates may be higher than those for the direct loan program. The qualification criteria are less strict than the requirements for direct loans. Most USDA loans are made under this program.
These are the eligibility requirements for a Section 502 Guaranteed Loan.
- Your household income must be below 115% of the median household income for the area.
- You must personally occupy the home as your residence. USDA loans can’t be used for rental, investment, or vacation properties.
- You must be a US citizen, non-citizen national, or qualified alien.
- These loans may be used for the same purposes as direct loans, but without the property-specific requirements.
These loans have no down payment, but you will pay an upfront loan guarantee fee and a monthly mortgage insurance fee.
Single-Family Housing Repair Loans & Grants (Section 504)
This program provides loans exclusively for home repair and improvement. The program provides loans that help low or very low-income borrowers to fix, improve, or modernize their homes. Low or very low-income borrowers over age 62 may be eligible for outright grants to resolve health or safety hazards in their homes.
Section 504 loans must be used for repair, improvement or modernization. Grants may only be used to address health or safety hazards.
You must meet program standards to qualify for a Section 504 loan:
- You must own and occupy the home.
- You must not be able to get an affordable home repair loan elsewhere.
- Your family income must be below 50% of your area’s median household income.
- Applicants for Section 504 Grants must be at least 62 years old.
Section 504 loans have no down payment. Interest rates on loans are fixed at 1%. The repayment period is 20 years. The maximum loan amount is $20,000 and the maximum grant amount is $7,500. A Section 504 Grant is essentially a gift, but it must be paid back if the property is sold within 3 years of the grant. Grants and loans may be combined.
Do I Need Good Credit to Get a USDA Loan?
USDA loans are available to many borrowers who would not qualify for conventional loans. They are still loans and you are expected to pay them back.
Many USDA loans require that the borrower must demonstrate the will and ability to pay the loan part of that process is a credit check. The standards are more relaxed than conventional mortgage standards, but there will still be minimum requirements.
You may still be eligible for a USDA loan even if you don’t have a credit history. You may have to show at least 12 months’ worth of evidence that you are paying your bills responsibly.
How Do I Apply for a USDA Loan?
Before applying for any USDA loan, you will need to assemble some personal data.
- Proof of US citizenship or Permanent Residency
- If You Are Not a Citizen, Proof of Qualified Status
- Tax Returns and Pay Stubs for the Last 2 Years
- Documents Showing Your Other Debts, Bills, and Financial Obligations.
- Your Credit Report
- Records of Rent, Utility, Tuition or Other Payments You’ve Been Making
Different types of USDA loans have different application processes.
For a USDA Guaranteed loan, you will work with a USDA-approved lender. Approved lenders are listed on the USDA Rural Development website. The lender will process your application through the USDA.
You will usually get preapproved by the lender, who will give you a maximum loan amount. Then you can look for a home within that cost in a qualified area. When you have selected a home the lender will prepare the final paperwork and submit it to the USDA for approval.
USDA Direct loans are not made through a lender. You will submit an application directly to a USDA Rural Development office. If you’re considering applying, contact your local office for advice.
USDA Section 504 Home Repair Loans are also made directly through the USDA. You’ll need to contact a home loan specialist at your local USDA Rural Development office.
USDA loans are among the most attractive home loans offered by a US government agency. Down payments and interest rates are lower than they are for FHA loans, and application criteria are less strict. For qualifying homebuyers in qualified areas, they represent a great opportunity and are worth investigating in detail. Not everyone will qualify but if you do you could get help buying or repairing a home on extremely advantageous terms.