The USDA home loan program is an enticing one for sure. With the ability to buy a home for 0% down, many people are rushing to learn more about it. Here are some answers to the most common questions.
Q. How do USDA loans differ from other loan programs?
A. The USDA is a government agency willing to back home loans in certain areas. This makes it a government backed loan and, therefore, it's easier for borrowers to get this loan than a conventional loan. A conventional loan is a mortgage not backed by the government, which puts lenders at a higher risk if you were to default on your mortgage.
The USDA home loan program is generally easy to be approved for if you meet some basic requirements. Lenders are more likely to loan money to you since the USDA is backing the mortgage product. There are two types of USDA home loans: Direct and Guaranteed. Your income will determine which you qualify for.
Q. Do I have to live in the home to qualify?
A. Yes! The USDA requires that the home you are purchasing become your primary residence. They will also take into account the income of all adults who will be living in the home. This can help you qualify if you are in a low-income household, however, it can also push you over the top end of the income limit and lead to you no longer qualifying for the program for making too much money.
If the latter is the case, you might consider another program like an FHA home loan (3.5% down) or the HomeOne program (3% down) that was just introduced in June 2018.
Q. Do I need proof of income to qualify?
A. Yes, as with any mortgage product, you will be required to show proof of income. The USDA will ask for this for two reasons: You need to make a minimum amount to qualify and, if you make above a certain amount, you will no longer qualify. They need to make sure you have enough money to pay back the loan without going over the top end of their set brackets.
If you're wondering the income brackets, these vary by county and they are available on the USDA home loan website. In fact, they have a handy wizard that will ask for your monthly income and zip code, then it will show you if you qualify for the Direct or Guaranteed program.
Q. Is good credit needed?
A. The USDA program will not necessarily turn you down just because you have poor credit, but your credit score will play a factor as it will with any mortgage product. Since your credit score is reflective of your borrower worthiness, your credit score is going to be considered when determining if you'll pay back the mortgage loan.
Q. How can I best determine what areas qualify as rural for a USDA loan?
A. The best way to figure out if your area qualifies for the USDA loan program is to head over to the USDA website and type in your zip code. It will show you if your county or surrounding counties are part of the program. More places qualify than you think and eligible areas are updated every year.
Q. How can I apply?
A. You can apply by figuring out if you qualify and then speaking with a lender who offers USDA home loans. Going through a mortgage broker will allow you to compare multiple home loan products at once and then score the best interest rate.
Every lender will offer you a different interest rate and different terms, so be sure to compare one option to another and figure out what's going to be best for your financial situation. Never just take the first thing offered to you! There are plenty of online tools so you can compare the current average interest rate and get a better idea of what you can expect given your credit.
Keep in mind that how much you can borrow will be based on your income. The USDA may also have a cap on how much they'll loan you, which will be based on the county's average housing costs. In most places, the cap sits at around $300,000 but, in more expensive areas, it can be more.
Learn how to get the best interest rates for a USDA home loan.
For any other questions you may have about the best mortgage program for you, contact our team of loan experts at Horizon Lending Services.