There are different types of home loans, and one of which is a USDA loan. This loan is issued by the United States Department of Agriculture and is part of their Rural Development Program. The program aims to encourage homeowners to set up shop in smaller communities in the country. They do this by offering a lower interest rate and lower down payment.
With this in mind, you may want to consider applying for a USDA loan. But before you do so, let’s first cover all the right basics.
Are You Eligible for a USDA Loan?
Before you can apply for a USDA loan, you must first determine whether you qualify for one or not. The USDA typically requires the buyer to live in a rural area with fewer than 35,000 residents. Additionally, the buyer’s income must not be 15 percent above the area’s median salary.
USDA loans only apply for primary residences and cannot be used for rental properties. To qualify for a USDA loan, a buyer must meet the down payment requirements and have a debt-to-income ratio of at most 41 percent. Unlike other loans, the USDA does not require you to meet a minimum credit score to qualify. However, you still must be able to show that you can manage your debt.
How Do USDA Loans Work?
There are three types of USDA loans: USDA-guaranteed loans, direct-issue loans, and home improvement loans. The USDA-guaranteed loans are ones guaranteed by the agency and issued by lenders approved by the USDA. To qualify for this loan, your income must not be 15 percent above the area’s median income. While there may not be a maximum borrowing amount for this loan, USDA-guaranteed loans typically do not exceed $400,000.
Like the USDA-guaranteed loans, the direct-issue loans also fall under Section 502 of the Housing Act of 1949. Instead of being issued by approved lenders, direct-issue loans are issued directly by the agency. For an applicant to qualify for this loan, they must not have an income that exceeds 50 to 80 percent of the area’s median salary.
The home improvement loan is the last type of USDA loan, and it falls under Section 504 of the Housing Act of 1949. Rather than being solely a loan, home improvement loans are actually a combination of grants and loans. And to qualify for this loan, the borrower’s income must be below 50 percent of the area’s median income. If granted this loan, borrowers can get up to $20,000 in loans and $7,500 in grants. For the loan portion, borrowers can repay it for over 20 years at just a one percent interest rate.
What Do You Need to Provide?
No matter the type of USDA loan you plan to apply for, you’ll still need to provide certain documents. The requirements may vary depending on the type of loan or lender. Still, generally, you can expect to provide a personal financial statement, a copy of an earnest money check, and a homeowners insurance policy quote.
If you’re working full-time, you’ll need to submit one month’s worth of your most recent pay stubs. On the other hand, if you are retired or self-employed, you must provide your tax returns for the past two years. And of course, don’t forget your social security card and a state photo ID.
As part of the USDA’s Rural Development Program, USDA loans aim to encourage homeownership in rural areas of the country by providing lower interest rates and down payments. Aside from the location, the agency and USDA-approved lenders will look at your income in comparison to the median salary of the area. This can determine whether you qualify for a USDA loan and what type you can get.
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