If you’re considering buying a home in a rural or suburban area, a USDA loan can help you get there with no down payment and low interest rates. That you are browsing Home for sale in Lexington, KY or Places to stay in Spokane, WAunderstanding how USDA home loans work can help you find the right property and financing option. This Redfin article explains what a USDA loan is, the requirements borrowers must meet, which homes qualify, and how to shop in the right neighborhood.
What is a USDA home loan and how does it work?
USDA loans are home loans that help low- to moderate-income families purchase a home in an eligible rural area. The loan is backed by the USDA, which allows lenders to offer competitive interest rates and no down payment to qualified borrowers. By making home ownership more affordable for more families, USDA loans, in turn, help these communities thrive and provide a better quality of life for rural residents.
There are two main USDA home loan programs:
- Single Family Home Loan Programprovided by private lenders
- Single Family Housing Direct Home Loanprovided by the USDA
USDA loan process
The process for getting a USDA loan is the same loan process in other bills, but with some notable changes. Here are a few different things you can expect:
- Work with an approved lender. The lender must be approved by the USDA, so you’ll need to add that requirement as you search for a lender.
- Assessment requirements. In addition to fair market value, an inspection must ensure that the home meets USDA safety and habitability standards.
- A perfect place. Your home search will be narrowed down to homes in the right area.
- Two-step authentication. Your loan approval may take longer as the loan needs to be approved by both your lender and the USDA.
What types of homes qualify for USDA loans?
To get a USDA loan, the property you are borrowing must be your primary residence. It cannot be an investment property, farm, vacation home, second home or rental home. Eligible buildings may include agricultural buildings, such as a barn or barn, but the property cannot be used primarily for income generation or commercial purposes.
The home must also be in a USDA-approved area, which is determined by the USDA based on population size and other factors. Although most eligible areas are rural, some urban areas are also eligible.
When inspected, the home must also meet certain guidelines set forth by the USDA. Among them are:
- A strong foundation in the building
- Beautiful roof
- Easy access from the road
- Active heating and cooling
- Electrical and plumbing systems
- Adequate and septic systems, if any
Several types of homes can be financed with USDA loans, as long as they meet the eligibility requirements outlined above. These homes include new construction and existing homes, manufactured homes, short sales, condos, townhouses and houses for consumption.
USDA borrower requirements
In addition to local regulations, USDA loans have borrower requirements. In general you will need:
- Meet income limits, which vary by county and household size (typically up to 115% of the area’s median income).
- Have a steady, reliable income.
- Show a credit score of 640 or higher for easy approval (lower scores may qualify for additional documentation).
- Maintain a reasonable debt-to-income ratio.
How to find USDA approved homes for sale
Now that you know more about what to look for, you can search listing sites using filters that help narrow results down to the right locations and property types. You may want to work with a real estate agent who is familiar with USDA properties and can help you find the right one for your needs.
Once you’ve found a home you like that you believe meets all the requirements, you can see if it’s in the right location by entering the address at USDA commodity eligibility map.
Remember that the final decision on whether a home is eligible is made by USDA Rural Development during the loan review process.
Applying for a USDA loan
- With Guaranteed Single Family Home Loansyou will need to apply with a USDA approved lender. This lender will handle the loan application process, working in partnership with Rural Development.
- To get a Single Family Home Loanyou can submit an application to your local USDA regional office.
>> Read: Types of Home Loans to see how a USDA loan compares to other options.
An important point
Understanding what a USDA loan is can help you decide if this type of loan fits your home buying goals. USDA-eligible homes can be a great option for buyers looking to buy in a rural or suburban area. These loans are very attractive because they require no down payment and often come with lower interest rates compared to conventional loans, making home ownership more accessible to qualified buyers.
