The following Guest blog post was authored by Kevin Pearina of USDALoans
In 1994, the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act reshaped USDA home loans. These loans, backed by the Department of Agriculture, remain one of the last home-financing options to feature no down payment. Generally, homeowners who finance a purchase with a USDA loan live in more rural areas.
The USDA saw a need for the program as a result of few lenders operating in rural areas where low-income families struggled to find financially-bearable loan options. In time, the program has expanded to include middle-class families in slightly more populous areas. Usually, families who get USDA loans are in cities or towns with no more than 25,000 persons.
Not every borrower qualifies for the 0 percent down payment perk, but like other government loan programs, down payments are a fraction of what traditional loan options offer. Rural Home Loans also come with lower, fixed interest rates and no private mortgage insurance. Homebuyers can finance 100 percent of purchase price even if they don’t pay anything down.
To list even more benefits, there are less restrictive financial and credit requirements. Credit scores of at least 620 usually satisfy lenders, but better credit allows for a higher debt-to-income (DTI) ratio. No matter what loan homebuyers attain, it’s best to keep DTI low. Borrowers can still qualify for a USDA loan with a monthly DTI as high as 41 percent.
Originally intended for repeat homebuyers only, USDA loans are now available to first-time homebuyers. At first, the program was designed for repeat homebuyers in need of more adequate housing. Only families occupying housing that is inadequate for the family’s size can qualify for a USDA loan. Another qualifying measure depends on borrower’s income. USDA loan applicants’ income can be as high as 115 percent of the median income of the area where the home is located.
The USDA determines whether a home is the right size per the family’s size. Oversized homes cannot be purchased with a USDA loan. Also, the USDA makes sure homebuyers are able to repay the loan in monthly installments. Like other government loan programs, the USDA does not issue the loan. USDA-approved lenders are funneled the money from the government and it is therefore available to borrowers.
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