It might seem odd at first that the United States Department of Agriculture offers a home loan program, but it does. Originally introduced in 1935 and named the Resettlement Administration, this program was designed to populate rural areas and help consumers buy and finance homes during the throes of the Great Depression. Today, the USDA program is the ideal choice for those wanting to buy and finance a home in these designated areas.
These areas are officially designated by the United States Census Bureau. Every 10 years as the national census is taken, the USDA identifies new areas that qualify for the program. Nearly 97 percent of the entire country is eligible for the program. To find out if a home is in an approved area, you can contact a USDA approved mortgage lender who will research the area and determine whether or not the USDA loan is an option.
An individual can’t determine whether or not an area qualifies just by looking around. Most likely in an area where there are very few homes, it’s probably okay. But it’s your loan officer who can make that determination for you. The USDA loan does not require a down payment and is offered with competitive, 30 year fixed rate terms. There are no adjustable rate options for the USDA program. The USDA loan also provides a guarantee to the lender. Should the loan ever go into default, the lender is compensated for the loss. This compensation is financed with two separate forms of mortgage insurance, an initial premium which is rolled into the final loan amount and an annual premium paid out in monthly installments along with the mortgage payment.
What may be surprising to many however is where the loan can actually be used. The last census was taken nearly 10 years ago. And as suburban areas expand, it’s possible a USDA loan can be used to finance a property in an area that looks nothing close to being rural. The only other zero down loan is the VA home loan program but that is reserved for veterans and certain members of the military. The USDA loan has no such restrictions regarding membership in a particular group.
In addition to location there are also household income limitations. For most parts of the country the household income limitation for a 1-4 member household is $82,700 and $109,150 for a 5-8 member household, all 18 years or older. Note, this is household income, not the income of those appearing on the loan application. In certain high cost counties, the limits can be as high as $125,700 and $165,900 respectively for 2019.
Applicants will be documented much like any other loan program. To verify income, paystubs covering the most recent 30 day period will be needed along with the last two years of W2 forms. Self-employed borrowers can be expected to provide the last two years of income tax returns along with a year-to-date profit and loss statement. Though there is no down payment needed there will still be standard closing costs. Your loan officer can provide you with a list of estimated fees at your request.
For approved areas the USDA loan is the proper choice. Conventional financing will require recent sales of similar properties in the area, typically no more than one mile away from the subject unit. In rural areas, there are few if any such comparable sales. This is where the USDA program comes into play and designed to finance such properties in approved areas.