USDA loans are a great way for first-time homebuyers to access the property ladder. These loans, backed by a government agency, 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 using the USDA program can be 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 home 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 and cost of living. Down payments are also a major obstacle for first-time home buyers and a USDA mortgage can 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 the first-time homebuyer 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 real estate property must meet certain criteria.
Borrower Eligibility
A borrower’s income limit applies and varies by location and household size. You must meet income limits and not exceed 115% of the area’s median income.
You must also be a qualified alien, U.S. citizen, or eligible U.S. non-citizen.
Finally, USDA loans require borrowers to have a credit score of 640, but borrowers with lower credit scores can qualify under specific conditions. Your debt-to-income ratio is also important, as USDA lenders use it to assess your financial health.
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 and metropolitan areas are excluded.
The property should be used as an owner-occupied 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 for a down payment. USDA loans make homeownership easier as they don’t require a down payment, which is a game-changer for many. First-time homebuyers only have to pay closing costs and the USDA annual fee.
Lower interest rate
Since the Department of Agriculture backs them, USDA loans often have lower interest rates than conventional mortgages.
Lower mortgage insurance
USDA loans require a guarantee fee (1% of the loan amount) and an annual fee (0.35% of the loan amount). These are lower than private homeowners 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 for qualified borrowers to finance closing fees into the loan, which can further reduce the upfront costs of buying your first home. Again, this is particularly helpful for a first-time home buyer.
The Application Process for a USDA Loan
To apply for a USDA home loan, you will need to do the following.
Check for eligibility
Check that your income falls within the USDA loan income requirements and that the home you want to buy is a property within an eligible area on the USDA map.
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
To establish your ability to repay the loan, 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 interested in buying a house 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 USDA loan 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 unlock homeownership by purchasing a home in a rural area. 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 for additional information regarding how to get a USDA home loan. We offer professional mortgage services, and our experienced Loan Officers will guide you through the loan process and help you make the best choice for your finances and home-buying expectations.
Frequently Asked Questions
Can first-time homebuyers benefit from a USDA mortgage?
Absolutely! For borrowers who meet the loan limits and credit score criteria, USDA mortgages are particularly well-suited for first-time homebuyers due to their no-down-payment requirement and flexible credit standards. Additionally, the low interest rates and payment subsidies can make homeownership affordable for those with limited financial resources.
What type of housing can be purchased with a USDA loan?
A USDA mortgage is intended for safe housing that is modest in size and cost. Eligible properties must be used as owner-occupied primary residences for at least three years and include single-family homes, newly constructed homes, and renovated homes that meet USDA standards. The property must meet safety, sanitation, and structural integrity requirements to qualify. You can also use part of the USDA loan amount as a home improvement loan. With a USDA loan, your new house could be just around the corner.
What costs are associated with a USDA mortgage?
Eligible borrowers should be aware of USDA fees that apply on top of closing costs. Specifically, there is an Upfront Guarantee Fee, a one-time fee (usually 1% of the loan amount) that’s added to the loan. There’s also an Annual Fee, a small recurring fee (around 0.35% of the loan balance) included in monthly payments. These fees are typically lower than the private mortgage insurance that comes with other government-backed loan programs.
