Everything You Need to Know About USDA Loans

USDA loans are designed specifically to help lower-to-moderate income buyers purchase properties in rural areas. If you’re looking to explore homesteading or simply enjoy a slower pace of life outside of the city, a USDA loan might be the right fit for you.

By the way, if you’d prefer to stay in the city, or if you make too much money to qualify, you consider other funding options like conventional loans or FHA loans. And if you are a qualified military service member, you should consider using your VA loan benefits.

In this article, we’re going to explain the ins and outs of USDA loans:

  • What is a USDA loan?

  • Who qualifies for a USDA loan?

  • And the pros and cons of USDA loans.

Here is everything you need to know about USDA loans!

What is a USDA Loan?

There are actually two different types of USDA loans:

  1. USDA guaranteed loans. This is the most common type of USDA loan. With a guaranteed loan, the US Department of Agriculture agrees to back your loan. This means that the USDA will help your lender recover their investment if you default on your loan. And since your lender has this extra assurance of payment, they can offer better loan terms, like a 0% down payment!

  2. USDA direct loans. USDA direct loans are loans made from the USDA’s own funds, directly to buyers. Instead of simply guaranteeing your loan to a lender, the USDA becomes your lender. This type of loan is less common and is reserved for low-income households.

In each case, the USDA is willing to offer these favorable loan terms in order to promote rural development.

Who is Eligible for a USDA Loan?

Each lender is able to set its own eligibility requirements for USDA loans (within legal limits, of course). But you can generally expect the following criteria:

  • The property must be in a qualifying area and must be in reasonable condition. You can check the USDA Eligibility Map to see which areas qualify for a USDA loan. And because the USDA is backing your loan, they need to confirm that the property is in reasonable condition according to the minimum property requirements.

  • Good credit. A good credit score shows that you can be trusted to manage debt. Lenders like to see a score of at least 620. If your score is lower than 620, you might still qualify for an FHA loan.

  • Acceptable income. Lenders need to see that you make enough money to cover all your debt payments (like credit card bills, student loans, and car loans, plus your new home loan) and still have enough money to cover living expenses like groceries and utilities. But because this program is designed to help low-to-moderate income buyers become homeowners, your income can’t exceed the program limits. Limits vary by county, so it’s best to check with a lender or to check the “Income Eligibility” on the USDA’s website.

Pros and Cons of USDA Loans

USDA loan pros:

  • No down payment

  • Lower interest rates

  • Closing costs can be rolled into the loan

  • No prepayment penalty

USDA loan cons:

  • Geographic restrictions

  • Income limits

  • USDA loans can only be used for primary residences. You cannot use a USDA loan to buy a vacation home, income property, or multifamily structure.

  • USDA Fees. You’ll pay an upfront origination fee for processing the loan. And then you’ll have recurring fees in the form of mortgage insurance premiums.

  • Potentially longer processing times than other loan types

We’re Here to Help!

At Sequoia Real Estate, we want to make the home buying process as enjoyable and stress-free as possible for you!

We know home financing options can be overwhelming. So we’re happy to answer your questions and refer you to reputable lenders who can explore your unique circumstances and find the ideal funding solution for you.   

Don’t let financing delay your house hunt! Contact us today for a friendly, no-obligation consultation!