What Is A USDA Loan?

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The effects of COVID-19 on the mortgage industry are undeniable. Between tightened mortgage approvals, non-essential office closures, and nearly a third of Americans unable to make housing payments, mortgage credit availability has continued to drop steadily with each passing month. But while getting a conventional mortgage is harder than it’s been in years, homeowners who no longer qualify could potentially find relief from an unlikely source: the U.S. Department of Agriculture.

As the rest of the mortgage industry grinds to a halt, the USDA home loan program carries on. According to a USDA statement, the agency is processing loans without significant delay, despite some administrative changes to accommodate social distancing measures. “June 2020 recorded the highest record of monthly volume since 2013,” a spokesperson for the USDA told us. “Overall loan production has increased more than 53% compared to the same period last year.” As of the first week of July, nearly 95,000 homeowners had received USDA loans since the start of the 2020 fiscal year, with a total value of $15.6 billion.

If your homebuying process has been put on hold due to COVID-19, a USDA loan could help steer you back on track. In fact, homeowners who no longer have the income or funds to qualify for a mortgage in the post-pandemic housing market are perfect candidates for the USDA loan program.

Pro Tip

As long as you qualify, there isn’t a catch to financing your home through a USDA loan program. Experts encourage all homebuyers who fall within their local income requirements to apply.

USDA Loan Basics

USDA loans are a type of mortgage backed by the U.S. Department of Agriculture, which allows lenders to offer more favorable terms than a standard mortgage. Buyers with low to average household income who don’t mind living in a rural or suburban area can use a USDA loan to purchase a home with no money down, often at a better interest rate than they would find elsewhere. Unlike similar programs, such as FHA loans, there are no additional costs to consider like PMI premiums

There are two types of USDA financing for single-family homes. The first is a guaranteed loan program in which approved lenders issue mortgages endorsed by the USDA. This is the most common type of USDA loan and the easiest to qualify for. 

Families with a greater need have access to a second type of loan, which the USDA issues directly. This program has a few additional qualifications; for example, applicants should demonstrate a lack of safe and sanitary housing and failure to qualify for other types of loans. Terms are even more generous than the guaranteed loan program, with repayment periods up to 38 years and modified interest rates as low as 1%.

Why Use a USDA Loan?

For buyers who have decent credit and don’t make too much money to qualify, there are quite a lot of benefits to a USDA loan with very few drawbacks. A USDA loan is the only government-backed mortgage allowing non-veterans to purchase a home with no money down. Interest rates tend to be significantly lower than you’d get from a conventional mortgage. And with mortgage rates sliding to record lows following the pandemic, this is worth considering. 

If there are any disadvantages, they’re purely bureaucratic. “USDA mortgage applications are paperwork-heavy,” says Dan Green, founder, and CEO of Homebuyer, an online platform dedicated to assisting first-time homebuyers with technology. “Loans are underwritten differently from conventional ones, and can take up to 30 days longer to approve.” Green cautions homebuyers to discuss processing times with their lender and leave plenty of wiggle room for the underwriting process, especially given limited staffing due to the ongoing pandemic. “You don’t want long approval times to jeopardize your closing date,” he says.

No down payment requiredMinimum credit score of 640
Available to low-income buyersHousehold income limit of 15% above the local median
Offers two types of single-family housing loansLong application period
97% of the geographic United States is eligibleRestricted to properties in rural and suburban areas

How to Qualify for a USDA Mortgage Loan

The USDA loan program is first and foremost designed to make homeownership accessible to low-income families. A list of income limits by county is regularly updated on the USDA website; if your household income exceeds the limit in your area, you won’t be able to apply. But even if you qualify as low-income, you can still be turned down if you have too much money in the bank. “There are also limits to assets,” explains D. Shane Whitteker, owner, and chief broker at Principle Home Mortgage, a Pennsylvania mortgage broker. “If you can put 20% down, you typically won’t be able to use this mortgage option.”

While USDA loan requirements are generous to low-income households, they’re less friendly to those with poor credit. Applicants need to have a minimum credit score of 640 to qualify, although lenders may set their own separate requirements. Debt repayment obligations should not exceed 41% of your pre-tax income.

There are also geographic restrictions on USDA financing. A USDA loan can only be used to purchase a home in a rural or suburban area. This sounds like more of a restriction than it actually is; from a geographic perspective, approximately 97% of land in the United States qualifies. Still, you won’t be able to buy a home in or near a city with one of these loans. Use the USDA interactive map to search specific addresses for eligibility.

Is a USDA Loan Best for Me?  

Not all homebuyers qualify for a USDA loan. If your household income is higher than average or you have enough cash to make a significant downpayment, you’ll likely be directed back to a conventional mortgage. But those who have been hit hardest by the pandemic and no longer qualify for traditional financing are the very ones who can be best served by a USDA loan. With favorable terms for low-income applicants, getting a USDA loan could be a no-strings way to sidestep stricter financial requirements in the current market.

If you think you qualify, you have nothing to lose by applying. “Every homebuyer in a USDA-eligible area should at least apply for a USDA mortgage,” says Green. “Rates can be a half-point lower than a comparable conventional mortgage rate.”