Definition of "USDA Loans"

Patti Whalen, Broker real estate agent
Patti Whalen, Broker, Real Estate Agent EXIT TLC Realty

USDA loans are a form of government-backed financing for both first-time home buyers and move up buyers looking for a second or third property. These loans have little to do with agriculture and should not be mistaken for Farm Loans - they are designed for residential purchases.

The qualification process is the same as for a conventional loan or an FHA loan, but the property must be located in an area deemed rural. Applicants can find whether the property they’re interested in is included in the approved area by visiting the USDA eligibility webpage - By inserting the address, the system will highlight how close to or how far from an eligible area that property is located, and consequently, home buyers can narrow their search.

USDA loans provide 100% financing, which means that homebuyers can purchase real estate with 0 down payment. Properties must be in decent moving condition though. The closing costs can also be paid by the seller or rolled into the loan if the appraised value is higher than the purchase price, so the loan amount will be larger.

Debt-to-income (DTI) ratio is the most important indicator of a buyer’s credit risk. To qualify for a USDA loan, future homeowners must not spend more than 30% of their income on housing (including principal, interest, PMI, tax, home insurance). Besides this, the minimum credit score accepted by most lenders is 620, although it could be lower if it’s compensated by savings or a downpayment. Lenders will usually require a history of employment. They don’t want to see large gaps between two jobs, or they might ask for an explanation. They need to see that applicants have had a solid job during the past two years, not necessarily with the same employer. Of course, recent college graduates might not have to meet this requirement, but for the rest, W2s and tax returns will have to be included in the application file. Renters will have to provide their landlord’s contact information for verification.   

One more thing that needs to be taken into consideration is the household income limit. For households with 1-4 members, the annual income limit is set at $82,700. For households with 5 members and more, the annual income limit is $109,150.

All borrowers have to pay private mortgage insurance (PMI), but it’s good to know that it is cheaper than for FHA loans. USDA loans are usually approved for a 30-year period with a fixed interest rate.  

Is it possible to have two USDA loans at the same time? The answer is generally no, however, you may own no more than a single family house to qualify for a USDA loan. Besides, you can’t use an USDA loan to purchase a vacation rental. You must reside in that property during the duration of the loan.

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