Are you looking to buy a home in a rural area, but having trouble finding a lender? Is your budget stretched so tight you don’t think you can afford to buy a home? If you answered yes to those questions, you might want to consider a United States Department of Agriculture (USDA) loan.
The USDA has been around for 80 years now, with the primary focus of creating opportunity and enriching the quality of life for those in rural America. So how does the USDA reach this goal? By investing in loans, loan guarantees, and grants for various projects in rural communities. In 2015, the USDA invested nearly $30 billion in approved loans and grants, making the overall portfolio $212.9 billion.
The United States Department of Agriculture (USDA) for Rural Development works with approved lenders to offer financing assistance in rural areas. It’s riskier for lenders to give loans up to 100 percent in rural areas because it can take longer to sell due to the distance from schools or shopping. So, if the borrower defaults, that could mean that the bank has a property that they won’t be able to sell quickly. From 2009 to 2015, the USDA helped finance 1.1 million loans for low-income and moderate-income homeowners in rural areas (source).
The two major factors in qualifying for a USDA loan are dependent upon your income and where the property is located.
These loans are specifically designed for rural towns that have a population of 35,000 or less. The USDA website provides an interactive map, which allows you to check whether an address qualifies for a USDA loan.
The USDA has three income brackets for its housing programs: very low income, low income, and moderate income. The income limits vary by state, county, the age of the applicant, and the number of people living in the household. Complete this questionnaire to see whether you meet the USDA income eligibility test.
USDA loan programs
The USDA has three loan programs to help borrowers get a loan in a rural area: the Guaranteed Loan Program, the Direct Loan Program, and home improvement loans.
Guaranteed Loan Program
This loan program is designed specifically for families with low to moderate income levels. This program guarantees loans up to 90 percent in eligible rural areas. This program is for owner-occupied properties only. Follow this link to find out the basic requirements to qualify for the USDA Guaranteed Loan Program.
You can use your USDA Guaranteed loan toward:
- Purchasing a new or existing residential owner-occupied property
- Closing costs and reasonable/customary expenses associated with the purchase
- Land for a new or existing home
- Home improvements, repairs, or renovations
- Real estate taxes
- Household items that are transferred with the property
- Energy efficient items
- Land improvements/preparation
Direct Loan Program
In addition to the guaranteed USDA loan program, there is also a Section 502 Direct Loan Program for low and very low-income applicants. This program provides subsidies to qualifying families to increase the applicant’s ability to repay the loan for a short amount of time. The amount of the subsidy depends on the family’s income level. Borrowers are required to repay all or a portion of the payment subsidy received over the life of the loan when the title to the property transfers or the borrower is no longer living in the home. No down payment is typically required and extended terms of 33 years, or even up to 38 years, are available for very low-income borrowers.
Typically, funds from the USDA Direct loan must be used for owner-occupied properties that are less than 2,000 square feet and have a market value at or below the local loan limit.
Home Improvement Loan
Not only does the USDA provide loan programs for purchasing a home in a rural area there are also loans specifically for refinancing your home to get out the money you need for home improvements through the Single Family Housing Repair Loans & Grants programs. Money obtained through this loan program can be used for repairs, improvements, modernization, or to add health and safety features.
How much can I borrow and how do I apply?
Regardless of ability to repay the loan, USDA loans have maximum loan amounts, based on the location of the property. Once you figure out if you meet the income eligibility and if your property is eligible, then you can contact an approved USDA lender to move forward with the approval process.
As with any loan, you will need to gather the proper income documentation to get the process started. So make sure you have:
- Two recent pay stubs
- Two years of tax returns
- Two years bank statements, if necessary
How to find a USDA lender
Meeting the USDA’s income, location, and loan amount requirements is only the beginning. Remember the USDA is not a lender. Instead, it guarantees the loans issued by USDA-approved lenders. There are hundreds of lenders that provide USDA loans.
Before you pick one, do your due diligence. SuperMoney makes it easy with free expert reviews and user comments.
Gina Young is an accomplished finance writer who has written for publications including Examiner.com, Lexington Law, Talk Markets, CreditRepair.com as well as her own blog (Money Savvy Living), giving budgeting and frugal living advice. With a bachelor’s degree in Accounting and Finance from Ashland University and a MBA from Indiana Wesleyan University, Young has impressive credentials in many aspects of investing, retirement planning, and personal finance.