To support small towns and provide opportunities for lower-income families, the Housing Act of 1949 authorized the United States Department of Agriculture (USDA) to support home ownership in rural America by offering USDA home loans.
Here is everything you need to know about USDA home loans.
What Are USDA Rural Development Home Loans?
USDA Rural Development home loans are loans from private lenders that the government backs under Section 502 of the Housing Act.
The USDA loan program provides two types of assistance: direct payments and loan guarantees.
- Direct payment assistance consists of subsidies that help very low-income homeowners make their monthly loan payments, while guaranteed loans are loans for families with moderate incomes.
- In a guaranteed USDA loan, the government guarantees 90% of the loan’s value if you cannot repay the loan. Guaranteed loans allow lenders to offer low loan interest rates.
USDA assistance enables people living in rural communities to remain part of those communities if they lack the resources to rent or purchase property through a traditional mortgage.
Who Is Eligible for USDA Home Loans?
To apply for a USDA loan, you must be a US citizen without safe, sanitary, and decent housing and:
- Be able to make monthly loan payments that don’t exceed 29% of your income
- Earn a stable income
- Have acceptable credit.
You can only take out a USDA loan for properties in towns with populations lower than 35,000 people. The USDA website provides a searchable map that indicates which addresses and areas are eligible for USDA loans.
The requirements for USDA direct loans are more stringent than USDA guarantee loans. To be eligible for a USDA direct loan, you must buy a single-family home. The home must be no larger than 2,000 square feet for direct USDA loans.
For guaranteed USDA loans, the home cannot be worth more than a preset limit and cannot have an in-ground swimming pool.
Pros and Cons of a USDA Loan
The USDA loan program helps people with bad credit or low incomes in rural areas afford homes, but these loans aren’t right for everyone. Explore these pros and cons to decide if a USDA loan is right for you.
Pros
- Direct loans include subsidies for payments.
- Lenders offer lower interest rates.
- You do not need private mortgage insurance.
- You can apply Section 502 assistance to outstanding loans subject to the COVID-19 moratorium on loan repayments.
- There is no credit score requirement for USDA loans.
Cons
- The USDA charges an upfront fee of 1% and an annual fee of 0.35%
- The house must be your primary residence.
- You cannot generate income from a house you purchase using a USDA loan.
McGowan Mortgages: Your Mortgage Expert
McGowan Mortgages is a dedicated mortgage lender with a personal approach to home mortgages. We know about USDA home loans and care about helping all our customers in Kansas City, MO, obtain the perfect mortgage. Take the next step toward owning your dream home by calling (816) 631-9687 to request a consultation with a mortgage expert today.
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