When you’re looking for a home loan, the options available can feel overwhelming and sometimes even confusing. Many people aren’t even aware of all of the different options available to them. The USDA is a government department that most people don’t associate with home loans, yet they are just as invested in rural development as they are in the food pyramid. We’re going to take a look at the USDA Loan loan process and FAQs and help guide you through the basics of this lesser-known loan process.
Key takeaways
- USDA loan is a government-backed mortgage for those living in rural areas.
- No down payment is required, competitive interest rates, and guaranteed fees.
- There are two types of USDA loans: guaranteed and direct loans.
- The USDA loan process includes prequalifying with an approved lender, finding a home in a designated rural area, and signing a purchase agreement before going through processing and underwriting. The process can take four to six weeks.
What is a USDA loan?
A USDA loan is a mortgage loan that makes home purchases more affordable for those living in rural areas. The loan is backed by the United States Department of Agriculture. Because of the government backing, lenders can offer a lower interest rate to qualified buyers and waive a down payment.
The USDA loan traces its roots back to the Great Depression when then President, Franklin D. Rosevelt, committed to building up rural America. The initial Executive Order that created the branch known today as USDA Rural Development was signed in 1935.
How does a USDA loan work?
A USDA loan can be acquired by those with the appropriate qualifications for both 15 and 30-year payback schedules. There are no official limits on the mortgage amount. This amount is determined by income and fair market rates in your location.
Some advantages of USDA loans include:
- No down payment required
- Guaranteed fees
- Competitive interest rates
Disadvantages of USDA loans include:
- Location-specific (not all areas qualify)
- Extra red tape and/or waiting times
This is a government-backed loan, so while there are advantages in the lower rates, you do have to meet several factors to qualify and may have to wait a bit longer for processing than conventional loans.
Different types of USDA loans
Guaranteed loan
A guaranteed loan with the USDA is a loan offered by a local lender but is at least partially insured by the USDA if the buyer defaults on the loan. This allows lenders to offer modest loan terms to lower-income individuals that don’t have the best credit scores. To be eligible for this kind of loan, the buyer’s adjusted household income cannot exceed more than 115% of the median income in their desired designated rural location.
Direct loan
A Direct USDA loan is when the USDA funds the borrower directly. They become the lender, rather than a bank. These loans are offered only to qualified low or very-low-income families.
Home improvement loan
These loans are offered to low-income Americans to assist in home renovation or repair. This loan may be combined with grants that don’t need to be repaid.
Applying for a USDA home loan
Eligibility and requirements
To qualify for a USDA guaranteed loan, you must meet the following requirements:
- Be a US citizen or a US non-citizen national or qualified alien.
- Demonstrate a willingness to meet credit obligations in a timely manner.
- Agree to use your home as your primary residence.
- Purchase a home that meets all criteria set by the USDA.
- Have an income that qualifies as “low” income or below in your intended purchase area.
- Not have been debarred or suspended from participating in other federal programs.
To qualify for a USDA direct loan, you must meet the above qualifications PLUS:
- Lack of access to safe, sanitary, and decent housing.
- Are unable to secure loans from any other source on reasonable terms that you are able to meet.
The USDA loan process
Prequalify with a USDA-approved lender.
The first step in the USDA loan process is to prequalify. Your lender will review your financial history, work history, and credit to decide whether you are qualified for a USDA home loan.
Apply for pre-approval.
Once you’ve been deemed eligible for the loan, you then must apply for pre-approval. Your lender will look over the same documentation as before to determine the mortgage amount they feel comfortable lending to you. Make sure to ask questions and read all documentation.
Find a USDA-approved home.
The next step is to go house hunting in a USDA-designated area to find an affordable home that meets your needs.
Sign purchase agreement.
When you find the house that’s right for you, it’s time for your lender to complete a final review and sign to associate the mortgage with the property.
Go through processing and underwriting.
The loan will be processed at this point, including the final USDA approval of the property. Again, make sure to read all paperwork and ask any questions that you may have about the process.
Close your loan.
This is the point where you sit down to sign all of the final paperwork. Typically it will only be a few days after this point that you can move into your new home.
How long is the USDA loan process?
When working with a lender for a USDA loan, you will typically find that the process takes four to six weeks. A backup of files because of the high volume could cause this period to be extended, but this is rare.
While not available to everyone, USDA-backed loans are an excellent resource for those who have low to very low incomes and want to purchase a home in rural areas. The USDA home loan program can open up new possibilities for those who may not otherwise have access to safe and affordable housing.
For more assistance, reach out to us!
If you’re ready to start your journey to homeownership and have considered a USDA home loan, reach out to the experts at Hero Home Programs™. They work tirelessly to find local and federal grants to assist with your home purchase and also work alongside local vendors who will help you save money on your home purchase.
