USDA loans are a great way for first-time homebuyers to access the property ladder. These loans come with no down payment, which is particularly helpful for buyers who don’t have enough savings or a previous home to sell. Add the low interest rates, and USDA loans become an excellent option for people willing to live in rural and suburban areas.
USDA Loans: the Summary
The United States Department of Agriculture (USDA) offers a loan program that can make the dream of homeownership a reality.
USDA loans are designed to help low—to moderate-income individuals and families purchase homes in eligible rural areas. They are backed by the Department of Agriculture, which is why they have such favorable terms.
First-time homebuyers often find it hard to find a home within their income range, especially in the current economy with such high interest rates. Down payments are also a major obstacle for first-time home buyers and USDA loans certainly help on that front.
What Is a USDA Loan?
USDA loans are mortgage loans backed by the United States Department of Agriculture.
These loans are part of the USDA Rural Development Guaranteed Housing Loan Program, which aims to promote homeownership in rural areas. The goal of this mortgage program is to help rural areas maintain or even increase their population.
USDA loans require no down payment, making them an excellent starting point for first-time buyers who may struggle to save for a large down payment.
USDA First Time Home Buyer Requirements
To qualify for a USDA loan, both the borrower and the property must meet certain criteria.
Borrower Eligibility
Income limits apply and vary by location and household size. Your income must not exceed 115% of the area’s median.
You must also be a U.S. citizen, U.S. non-citizen national, or qualified alien.
Finally, USDA loans require borrowers to have a credit score of 640, but borrowers with lower credit scores can qualify under specific conditions.
Property eligibility
The property you wish to purchase must be located in an eligible rural area as defined by the USDA. The USDA approves properties in rural and suburban areas, which means that cities, towns, and urban areas are excluded.
The property should be used as a primary residence and meet all applicable health and safety standards. It should be 2,000 square feet or less and not have an in-ground swimming pool. You can’t rent the property or use it for investment purposes.
Benefits of USDA Home Loans for first time buyers
No down payment
Prospective buyers often find it challenging to save money towards a down payment. USDA loan facilitates homeownership and is a game-changer. First-time homebuyers only have to pay closing costs.
Lower interest rates
Since they are backed by the Department of Agriculture, USDA loans often have lower interest rates than conventional loans.
Lower mortgage insurance
USDA loans require a guarantee fee (1% of the loan amount) and an annual guarantee fee (0.35% of the loan amount). These are lower than private mortgage insurance, which is applied to conventional loans. This lowers monthly payments and is particularly helpful for first-time homebuyers.
Closing costs rolled into loan
Another advantage of a USDA loan is the possibility to finance closing costs into the loan, which can further reduce the upfront costs of buying a home. Again, this is particularly helpful for first-time homebuyers.
The Application Process for a USDA Loan
To apply for a USDA loan, you will need to do the following.
Check for eligibility
Check that your income falls within the USDA loan requirements and that the home you want to buy is located in an eligible area.
Find a USDA-approved lender
Find a USDA-approved lender like Society Mortgage who can take care of your application from beginning to end.
Gather documentation
Gather all necessary documentation, such as proof of income, proof of identity, tax returns, bank statements, and other financial information.
Wait for the appraisal
After your application is conditionally approved, an appraisal will be ordered to verify the property meets USDA standards and to determine its value. If everything checks out, you’ll receive final approval and move forward with closing on your new home.
Potential Drawbacks of USDA Loans
While USDA loans come with many benefits, there are some potential drawbacks to keep in mind, starting with the geographic restrictions. These can be limiting, as the property must be in an eligible rural area. This may reduce your options if you’re looking to buy in or near urban areas.
Income limits can also be a barrier for some buyers. If your income exceeds the limit for your area, you won’t qualify for the program.
Finally, USDA loans may take longer to process than conventional loans due to the additional layer of government approval, which could slow down the home-buying process.
USDA Loans for First-Time Homebuyers
USDA loans can be an excellent option for first-time home buyers looking to purchase in rural areas. With their no-down-payment requirement and competitive interest rates, they make homeownership more accessible for many who might otherwise struggle to buy a home.
If living in a rural or suburban area fits your lifestyle, contact a USDA lender like Society Mortgage. We are qualified mortgage professionals, and our experienced Loan Officers will guide you through the process and help you make the best choice for your finances and home-buying expectations.
