7 USDA Rural Development Loan Facts

by on September 23, 2012

Obtaining a mortgage usually requires that people have at least 20 percent of the purchase price on a house in order for some lenders to grant them the loan. This requirement made it impossible for many lower income families to stop renting and become homeowners. The U.S. government has several programs that make it easier for people to obtain the money they need to purchase a house, and one of those is the USDA Rural Development Loans.

1. What Are USDA Rural Development Loans?

USDA Rural Development Loans do not require those who qualify for them to offer a down payment. If future homeowners are going to purchase a house within a rural area where USDA RD loans are accepted, they can apply for this type of loan. The house they wish to purchase cannot be a mansion; if it is considered a modestly designed house and of moderate price, it may qualify for USDA loans.  Applicants may use their USDA loans for several purposes. They can purchase a home and make improvements to it, if necessary. These loans can also be used to improve the land by adding a sewer system or water system if they do not exist in the area.

2. The Definition of a Modest House

In order to qualify as a modest house, the home will need to have been moderately designed as compared to the rest of the housing in the area. Its value cannot be more than the amount allowed to qualify for the mortgage, and it cannot have certain disqualifying attributes such as a swimming pool.

3. What Qualifies People to Receive a Rural Development Loan?

Several things will need to be considered before people can apply for a Rural Development Loan:

  • Income – The family income can only be 115 percent of the median amount in the applicants’ area.  The applicant must also meet the maximum debt-to-income ratio requirements for USDA loans, which are 29% for the housing ratio and 41% for the total debt ratio.
  • Their Present Situation – The family must be able to demonstrate that they are currently living in inadequate housing.
  • Payment – They must be able to afford to make the monthly payments, pay the property taxes and afford to purchase a homeowner’s insurance policy.
  • Credit – Their credit scores must be at least 620 or above.

4. The Loan’s Terms

USDA RD loans have 30-year terms, and the interest rate can depend on the applicants’ credit histories. The lenders are entitled to set the clients’ interest rates as they see fit, but these interest rates will be fixed and not adjustable. The lenders also determine the applicants’ debt-to-income ratio when setting their clients’ interest rates. By doing this, they are deciding how likely it will be for the applicants to repay the loan. Those determined to be the most likely to repay the loan will receive the lowest interest rates.

5. What is the Maximum Purchase Price Allowed?

There is no set maximum purchase price for a USDA Mortgage. Instead, the borrowers qualifying income and debt-to-income ratios will determine if the home is affordable or not.  The applicant’s family income must also be less than 115% of the median income in the property area.  USDA offers a useful calculator for people to check their income eligibility here.

6. How do I Know if a Property is Eligible for USDA Rural Development Loans?

First, the property must be in an approved rural area of the United States, as defined by USDA.  They offer a great tool to check the eligibility of a specific address here.  Eligible property types include existing single-family homes, new construction, modular and new manufactured homes and Planned Unit Developments.

7. How Do People Apply for These Loans?

In order to apply for USDA loans, hopeful applicants need to make contact with an approved USDA lender.

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Spencer is mortgage insider and expert in home finance.

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