If you prefer pastures over the pavement, purchasing a home in a rural or suburban area is easy with a USDA loan. As part of the USDA Rural Development Guaranteed Housing Loan Program, USDA loans are most ideal for low to moderate-income borrowers.
Prospective homeowners are often pleasantly surprised by this mortgage's accessibility, its below-the-market USDA loan rates, and lack of a down payment requirement. If you feel that a USDA loan can best satisfy your home-owning goals, then read on! Take a closer look at how they work, whether you qualify, and who offers the best rates on the market.
How USDA Home Loans Work
A fairly young loan program, USDA loans aim to populate real estate in rural areas that boast a lower occupancy of 20,000 or less. Contrary to what the term "rural" might suggest, up to 97% of states across the country are eligible for USDA loans. Not every private lender will advertise it on their menu of services – but many will offer them anyway.
USDA loans are guaranteed by the U.S. Department of Agriculture. What separates them from traditional mortgages is their ability to finance 100% of a home's purchase price. Better yet, its closing costs are ordinary and borrowers aren't required to shell out for a weighty down payment. However, USDA loans differ in that they don't offer ARMs and require homebuyers to abide by a fixed interest rate.
Types Of USDA Loans
The Department of Agriculture offers three main types of USDA home loans.
Similar to an FHA or VA loan, a USDA loan guarantee insures a portion of the mortgage a borrower owes on the occasion that they default. Because of this protection, lenders that offer loan guarantees can usually accommodate modest terms to individuals with lower credit scores.
Borrowers eligible for a direct loan exist lower on the income-earning scale. To determine whether you are considered a low-income earner, your annual earnings must fall under the income limit of your designated area. For individuals who have no other access to a suitable home loan, the USDA direct loan makes for an exceptional alternative, offering interest rates of as low as 1%.
Home Improvement Loans
Depending on your family's circumstances, a USDA home improvement loan can be combined with a grant that borrowers need not repay. Some packages offer up to $27,000 in assistance for individuals looking to upgrade certain home features. To receive a grant of up to $7,500, borrowers need to be at least 62 or older.
Am I Eligible For A USDA Loan?
Whether or not you qualify for a USDA home loan will depend primarily on your income, family size, and location. Other qualifying criteria include the following.
You Have Moderate Income
Though meant for "low-income" citizens, you'll still want to have a dependable income. Your income cap will be determined by your region's median salary. To qualify, you mustn't exceed the median rate by more than 15%. If your city's median salary, for example, is $65,000 a year, you can't be earning more than $74,450.
You Have An Acceptable Credit History
Your credit scores need not be stellar to be entitled to a USDA loan program. Credit scores of at least 640 or higher are often prioritized by lenders, though lower marks are still accepted. However, borrowers must prove that they haven't converted any accounts to collections within the 12 months prior to their application date.
If your credit score lies on the lower end of the spectrum, even temporarily, you must present evidence that your finances were impacted by circumstances out of your control. These might include medical emergencies or accidents. If you're without a credit history altogether, you can obtain non-traditional references such as rental and utility payment records.
Your Home Is Listed In An Eligible Area
Whether an area is eligible to receive USDA funding or not will change according to information collected in a yearly census. Though populations are most commonly considered rural at 20,000 or less, some areas are permitted with populations of up to 35,000.
A city might also be considered rural if it upholds certain characteristics or lacks available credit. You can easily check your area's USDA eligibility using an online interactive eligibility map. If your area doesn't meet USDA criteria, you can search rural areas within a few kilometers from yours.
When To Apply For A USDA Loan
USDA home loans are ideal for first-time homebuyers looking to fund a real estate purchase in a rural area. If you find yourself wanting to pursue the following projects, a USDA loan might be suitable for you.
You Want To Purchase A New Property
Whether on the hunt for a newly-built home or previously-owned property, you can apply for a USDA loan so long as you intend for the property to be your primary residence. USDA loans can't be used to fund vacation homes or other investment properties.
You Want To Remodel Your Current Home
USDA loans are also appropriate for financing a home renovation. With one, you can achieve appliance or structure replacements, site preparation, water, electricity, and gas connections, or whatever remodels you're after. If you're living with a family member suffering from a physical disability, a home loan can help you foot the bill for installments that make your primary residence more accessible.
How USDA Loan Rates Compare To Other Loan Rates
As compared to any other loan program, USDA mortgage rates are often the lowest available. They're matched only by VA loans, available exclusively to veterans. On average, interest rates on FHA and conventional loans sit 0.5% to 0.75% higher than those attached to a USDA mortgage.
Having said that, you won't always score a below-market interest rate. To do so, you'll have to present a higher credit score or place a down payment, even when you don't have to.
If you choose to forego the down payment, you'll be required to cover an up-front insurance premium of about 1% to 2% of your total loan amount. Ongoing premiums come with a 0.35% to 0.40% charge throughout the life of the loan. If your loan costs $200,000, for instance, your up-front fee might cost $2,000 with your monthly premium set at $58.
USDA Mortgage Lenders With The Best Rates
Though all USDA loans adhere to the guidelines set in place by the Department of Agriculture, requirements by private lenders may vary. Depending on your specific financial circumstances, shop around for a lender who can meet you halfway.
New American Funding
The Best Option For: Borrowers with a low or non-existent credit score
Most lenders will cater to borrowers with a healthy credit score of at least 640. However, New American Funding is flexible in its ability to shoot as low as 580. If without a credit score to present, NAF accepts non-traditional methods of documenting income. Located in California, NAF offers mortgage terms of between 8 to 30 years and offers a current interest rate of 3.07%. To get a quote, you can contact a service agent over the phone or via the official website's online portal.
Fairway Independent Mortgage Corp.
The Best Option For - Clients seeking top-notch customer support
Among the highest-ranked mortgage lenders based on customer satisfaction, Fairway Independent Mortgage Corporation has erected nearly 400 branches across the country. Chock-full of educational resources and information for first-time borrowers, you may not even need to contact a customer service agent. With Fairway, you can apply for a loan as quickly as 10 minutes and get approved in just 10 days. With a minimum credit score of 640, Fairway offers fixed-rate terms in intervals of 5 years between 10 to 30 years.
The Best Option For - Home shopping and financing all-in-one
If you'd rather not consult another website for your home shopping needs, you can search for a property directly from Vylla's home page. Rich with solutions for first-time homebuyers and return homebuyers alike, Vylla is praised for its universal interface. If you have weaker credit, don't worry – you can get approved for a USDA loan with a credit score of just 550. At an interest rate of 3.07%, Vylla makes for an excellent all-in-one USDA mortgage source with comprehensive information and flexible terms that suit homebuyers from all walks of life.
The Best Option For - Online processing
With less paperwork to do than usual, Quicken Loans is a popular service among USDA home loan shoppers who are a little more tech-savvy. Nowadays, everyone performs their research online. After closing a deal with Quicken, you can even keep an eye on your interest rates with a weekly report. Users love Quicken for its lack of hidden fees – they'll even manage 99% of your mortgages, which means you won't have to meet with other parties after formalizing your application. Their minimum credit score requirement is 620.
The Best Option For - Existing Costco members
One of the largest membership-only warehouse clubs across the country, Costco Wholesale comes with a ton of benefits and discounts for existing members. If you're an executive member, lenders' fees are capped at $350, while lenders' fees for gold star members are capped at $650. That being said, membership isn't required. Because Costco's website is mobile-friendly and the process completely automated, it's incredibly user-friendly – you almost can't go wrong with it. The interest rate you receive will be up to a lender's discretion after studying your credit history.
The Best Option For - Traditional lending and online pre-approval
Around for over 160 years, PNC has a lot of experience in its pocket. If you're worried about your prospective interest rate, its website publishes current numbers on a regular basis. Give customer service a call and you'll get all the information you need on the USDA home loan you're after. Though the application process must be completed in person, you can get pre-approved online in as quickly as ten minutes. Afterward, you can track your application status on their website and get updated information regarding changing USDA mortgage rates. To get approved with PNC, you'll need a minimum credit rating of 640.
The Best Option For - Low-income earners with looser application needs
With the most affordable loan options online, SunTrust is popular with individuals who aren't earning as much as they want to. However, to get your hands on a personal rate, you'll need to start an application. Having said that, you can complete the entire process remotely with access to a plethora of online tools offered completely on-site. If you need more information, you can chat with on-site agents, in person, or on the phone. With the help of SmartGUIDE, getting on a USDA loan program is easiest with SunTrust. To achieve the home loan you're after, you'll need a credit score of 640.
The Best Option For - Reliable lenders
A household name, Wells Fargo is one of the most reputable USDA home loan providers across America. It has a world-class selection of rates and products that most prospective homeowners can't wait to get their hands on. Its online features make applying for a USDA loan program incredibly convenient – you can even get application process updates whenever they occur. If you're a stickler for tracking current rates, Wells Fargo regularly updates its site to reflect them. Consistently earning a 5-star rating with previous clients, Wells Fargo is always in-demand. To qualify for its competitive rates and the right USDA loan for you, you'll need credit of at least 620.
The Best Option For - Flexibility and Spanish-speaking citizens
If you've been suffering from a language barrier, Alterra is the place to get on the USDA loan program. Its website offers a fully-Spanish version and employs bilingual loan officers. If you're an undocumented immigrant, you have an equal chance of qualifying with ITIN. Interest rates, however, may be higher for these types of home loan applicants. Alterra is also known for its flexible qualification paths for low to moderate-income borrowers that are self-employed.
Tips For Qualifying For A USDA Loan
For borrowers who can't afford a personal or conventional loan, the USDA way is the only remaining path to take – but it isn't as easy to process as you think. Here are a few tips for securing a USDA rural loan and milking the best possible rates.
Ensure that you and your home qualify. Get a head start before jumping into a loan process you may not be entitled to. Though thousands of cities qualify, "rural" and "USDA rural" won't always mean the same thing. Determine whether your area counts and whether you can successfully apply for this type of home loan by taking an online questionnaire or consulting with a financial advisor.
Review your credit score. Just because USDA loans home borrowers with poorer credit ratings doesn't mean you can get away with near-bankruptcy. Though qualifying rates drop as low as 550, USDA loan lenders still favor applicants with credit scores of at least 640 to 680. Dispute any errors and inaccuracies that may have occurred in your recent reports – leaving them be can hurt your chances of securing a loan.
Detail your employment history. If you've been employed for at least two years, be sure to document your income thoroughly. Start compiling resources you may need to access in the near future. If you were previously a company employee and now self-employed, you may have to perform non-traditional methods of accounting.
Don't settle for just one lender. As with any loan product, you'll want to shop around for opportunities before settling with a lender who makes an attractive offer. You never know – you may stumble upon a USDA loan with even better terms.
Contrary to how they're perceived, a USDA loan isn't exclusive to farmers or agricultural employees. If you live in a rural area or simply can't afford skyrocketing purchase prices, a USDA loan can ease your home buying burden. If you feel you qualify for this type of loan and want to browse your options, get in touch with Wesley Mortgage, LLC – we'll see what we can do!