USDA mortgages include a variety of home loans and mortgage programs that are sponsored by the United States Department of Agriculture. While these programs are income-restricted and only available in certain areas, they make purchasing a home accessible because there’s generally no required down payment.
Three USDA Mortgage and Home Loan Programs
The USDA administers three distinct home mortgage and loan programs, each of which has its own requirements and uses.
Section 502 Direct Loans are underwritten directly by the USDA and can be used to purchase, build, renovate or repair a home in a qualified area. These loans are available to low-income individuals and families, and they often come with additional financial assistance. Depending on specific circumstances, a direct loan may come with an interest rate as low as 1 percent, offer repayment help and/or span upwards of 38 years.
USDA Guaranteed Loans are more traditional mortgages that approved lenders underwrite and the USDA backs. The USDA guarantees up to 90 percent of the borrowed amount, which makes these somewhat similar to VA or FHA loans. While the lender ultimately determines whether they want to underwrite a USDA Guaranteed Loan, most lenders will ease requirements a little since a government agency is backing the mortgage. As with 502 Direct Loans, guaranteed loans come with income and region restrictions.
Section 504 Loans are also known as USDA Housing Repair Loans and Grants, because that’s what these are. These loans are offered directly by the USDA, and they provide as much as $20,000 to low-income homeowners who need to repair, improve or update their homes. Some homeowners also use the loans to remove safety and health hazards form their residences.
Section 504 also provides grants to elderly homeowners who need to make repairs or renovations to their homes. Grants go up to $7,500 and don’t have to be repaid.
USDA Mortgages Generally Don’t Require a Down Payment
The biggest advantage of USDA mortgages is that they typically don’t require homeowners to have a down payment. The USDA itself regularly underwrites mortgages with 0 percent down, and many traditional lenders will provide USDA-guaranteed mortgages with nothing down since the agency backs almost all of the loan.
By not requiring anything down, USDA mortgages are much easier to obtain than most conventional mortgages. Whereas most traditional mortgage programs require at least 3 or 5 percent down, the USDA generally requires nothing. Even on a $100,000 house, that’s a difference of several thousand dollars.
A borrower’s debt-to-income ratio is also a factor, but this is one consideration that bucks the trend of stricter requirements. Some lenders have a limit of a 45 percent debt-to-income ratio (meaning 45 percent of income goes toward debt payments), but others may relax this a little for homebuyers who otherwise can show they’re in an especially strong financial position. The debt-to-income limit for conforming loans is usually 45 percent.
Income and Geographic Requirements for USDA Mortgages
In most cases, homebuyers must meet four requirements to qualify for a USDA mortgage (including both Section 502 and USDA Guaranteed Mortgages).
The first requirement is simple ‒ these mortgages are only for primary residences. They can’t be applied to second homes or investment properties.
Second, borrowers must meet income requirements. The exact income requirements vary slightly by program, but borrowers generally can’t earn more than 115 percent of the median income in their area. The brackets used are broken out into two groups: households with one to four people and households with five to eight people.
Third, borrowers also need to show their creditworthiness. While prospective buyers must go through the full application screening process, creditworthiness generally requires a credit score of 640 or greater. Also, delinquencies, judgments, bankruptcies or other issues on a credit report might result in rejection even if the credit score itself is sufficiently high.
Fourth, the home that’s purchased with any USDA mortgage must be in an approved area. Approved areas are usually suburban and rural regions.
There are no set nationwide limits as to how much homebuyers can borrow through a USDA mortgage if they qualify.
Other Factors the USDA Considers
When faced with more applicants than the agency can provide mortgages to, the USDA prioritizes applicants based on other factors. At times, homebuyers who are without “decent, safe and sanitary housing” and who can’t secure a mortgage from a traditional lender may be prioritized.
Apply for a USDA Mortgage to Purchase Your Home
If you’re in a low- to mid-income level and willing to purchase a home in a rural setting, check to see whether you qualify for a USDA mortgage. If you do, contact us and you may be able to get into a new home without paying any down payment.
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