How Do USDA Loans Work?

Encouraging homeownership in small communities is one of the goals of the United States Department of Agriculture (USDA)’s Rural Development Program, and as Forbes reports, USDA loans are one of the tools they use. These low-interest, low-down-payment mortgages are designed to help low- and moderate-income borrowers make the leap from being renters to homeowners. How do USDA loans work?

How Do USDA Loans Work?

With a USDA loan, you have the chance to snag a 30-year fixed-rate home loan with a competitive interest rate and no down payment requirement, according to The Mortgage Reports. That’s a deal many aspiring homeowners would want to know more about.

How do USDA loans work? To understand that, you’ll want to know what types of USDA loans are available, where you’ll need to go to apply for them, and how your geographic location affects your chances. It’s also smart to review the eligibility requirements for borrowers who hope to use a USDA loan.

USDA Guaranteed Loans

The PrimeLending at Kansas City branch offers the USDA Guaranteed Loan, which is the type of mortgage that most people think of when someone references USDA loans. It works much like a VA loan. USDA-approved private lenders make the actual loans, and the USDA stands behind the mortgages with a 90-percent guarantee for lenders. This government backing reduces the risk for lenders, enabling them to offer better terms to more borrowers, including those with less-than-perfect credit.

Applying for a USDA Loan

As SmartAsset makes clear, the method you’ll use to apply depends on the type of loan that you hope to get. People interested in either a repair loan or a direct loan should contact their local USDA Rural Development office. Are you curious about the USDA guaranteed loan? In that case, you’ll need to find a lender who offers USDA loans.

Geography and USDA Loans

USDA loans are meant to promote homeownership in rural communities, so location is a factor in determining whether you can get a loan. However, you aren’t restricted to homes nestled in the countryside. As My Mortgage Insider notes, some 97 percent of the U.S. is USDA-eligible. Homes in the heart of the city are unlikely to make the cut, but many properties in the suburbs will. The USDA provides online maps that make it easy to check the eligibility of a property that you’re interested in.

Eligibility Requirements for Borrowers

Borrowers must also meet certain eligibility requirements if they hope to use a USDA loan. The Mortgage Reports offers a useful overview that can help you decide if you might qualify:

• Citizenship: Borrowers must be U.S. citizens or legal permanent residents.
• Owner-Occupation: Borrowers must be planning to live in the home that they’re purchasing with the USDA loan.
• Income: The USDA sets an income limit that varies by area. The borrower’s income cannot exceed their area’s median income limit by more than 15 percent. In addition, they must have a dependable income, and they should be prepared to show a history of that income extending back at least two years.
• Credit: Borrowers are expected to have a minimum credit score of 640 and an acceptable credit history.

At PrimeLending of KC, we believe that buying a home should be a positive experience. We will work with you to help you find the right loan product for your specific needs, provide personalized service, and guide you through the entire mortgage process. Reach out today to learn more about our services.