The USDA loan program is designed to encourage rural development across the country. Insured by the U.S. Department of Agriculture, USDA loans offer no-money down mortgage financing, fixed interest rates, which are much lower than the national average of other fixed-rate mortgages, standard closing costs and repayment schedules, no prepayment penalties, and flexible terms and conditions, including the ability to roll the closing costs into the loan.
Though the USDA loan is one of the most affordable and flexible types of mortgages a home buyer can find, there are two major downsides: 1) the limited number of lenders offering USDA home loans; 2) the borrowers are required to pay USDA mortgage insurance, which implies a fee of 2 percent of the loan amount for purchases and refinances, paid at the closing, and an annual fee of 0.40 percent of the remaining principal balance.
The USDA loan program assists low- and moderate-income approved borrowers in purchasing “adequate, modest, decent, safe, and sanitary dwellings” as primary residences in eligible areas. This type of loan includes specific eligibility criteria, such as:
- the property must be located in an eligible area (e.g. rural or suburban area);
- the home buyer must meet certain income limits (the annual earnings shouldn’t exceed the median household income of the county by more than 15 percent); buyers with a very low income can apply for a Section 502 direct loan;
- the applicant must have U.S. citizenship or permanent residency and use the house as primary residence;
- the USDA loan cannot be used to finance the purchase of a vacation home or rental property;
- the borrower shouldn’t have been excluded from participation in state loan programs;
- the applicant must demonstrate a job history of minimum two years and the ability to repay the loan;
- the monthly payment shouldn’t exceed 29 percent of the gross household income (the total debt-to-income ratio shouldn’t exceed 41 percent);
- the borrower should have a good credit score (while applicants with a minimum score of 620 will benefit from streamlined processing, those with scores below 580 must meet more stringent eligibility criteria); rejections are typically based on foreclosures or bankruptcies over the last 3 years and outstanding collection accounts, tax liens, and open judgment over the past 12 months.
An important aspect often overlooked is that applicants don’t have to meet all eligibility requirements to qualify for a USDA loan. The loan can also be used for covering site preparation costs (e.g. grading, fences, driveways, etc.), for repairs or upgrades to an existing property in an eligible area, or for refinancing another USDA loan to get a lower rate and monthly payment.
Applying for a USDA Home Loan
To apply for a USDA loan, a home buyer must approach a participating lender. Then, he must complete the application process, which is similar to that of any other mortgage. To find out more about this program, you can get in touch with one of our mortgage advisers by calling (904) 389-4635. At North Florida Mortgage, our expert staff will be more than happy to analyze your application and, if you qualify, walk you through the entire loan application process to ensure a hassle-free home financing experience.