The Ins & Outs of USDA Loans: A Checklist

During the height of the pandemic, many Americans decided to look for new, larger homes after feeling cramped in city apartments or smaller houses. There were so many buyers that people might have been better off taking out classified ads to help. 

WANTED: Additional space needed for an entire family working from home and remote schooling. 

City dwellers looked to move to the suburbs. And families in smaller suburban homes searched for bigger spaces with larger yards or outdoor spaces. That led to prospective homebuyers moving to the countryside, especially since an easy commute to an office may no longer be the motivating factor in choosing where to live.

This article will look at what it takes to move to the exurbs — i.e., America's rural countryside. There are plenty of rural communities that gladly welcome new young families, and a USDA loan from Movement Mortgage may be the way to get there.

Just what are USDA Loans?

USDA loans are low-interest, zero-down-payment home loans specifically designed for low- and moderate-income households who currently live in — or are considering moving to — a rural area. 

While USDA loans have been around since 1935, when the U.S. government wanted a strategy to lessen overcrowding in big cities and help populate struggling rural communities, the program really got a boost in 1991. That's when the Department of Agriculture introduced the Single-Family Housing Guaranteed Loan Program. This allowed home-buyers who wouldn't typically qualify for a traditional mortgage to apply for a government-backed loan to purchase, construct or renovate homes in specific rural areas. 

Being a government-backed loan geared towards borrowers who have trouble getting loans elsewhere, there are some restrictions to keep in mind. We'll get into the details in a minute, but here are the three main ones to be aware of.

1. Homes being financed need to be located in a designated rural area, as dictated by the United States Department of Agriculture. 
2. The towns that the financed properties are located in must have fewer than 35,000 residents.
3. Your combined household income can be no more than 115% of the median income for the region you're looking to live in. 

USDA loan benefits

While there are some restrictions, there are also some great benefits of the USDA home loan program — especially for borrowers who may be new to the home-buying game. 

Here are some of the major benefits:

• It's OK to have imperfect credit. Having what is considered a “low” credit score alone will not make you ineligible for a USDA loan.
• Zero down payment! While it may help lower monthly payments, you don't necessarily have to put any money down to qualify for a USDA home loan.
• No PMI. When down payments are below 20% with other loans, borrowers may have to pay private mortgage insurance (PMI). But that's not the case with a USDA Loan. Instead, an annual guarantee fee is paid by the lender, who then recoups that fee from the homeowner's monthly mortgage loan payment. No PMI for you!
• Favorable rates. Mortgage interest rates are typically lower than average for this government-backed loan.
• More time to pay it off. Loan terms may be more lenient than traditional mortgages. The time allowed to pay back the loan can be pushed to 33 years in some cases. For very-low-income applicants who qualify, the payback period may even be 38 years. 
• You're less of a risk! Loaning money to anyone presents a risk for lenders, but the USDA guarantees 90% of the loan if the borrower defaults. That alleviates the risk that lenders might be cautious about, which in turn opens the door to more potential homeowners.

Do you qualify for a USDA Loan?

Use the following checklists to see if a USDA Loan is right for you.

Borrower requirements:

• You must be unable to get a loan with terms you can reasonably meet from any other resources.
• You must be committed to occupying the property as your primary residence.
• You must meet income eligibility, which varies based on where you're looking to live.
• You must be a U.S. citizen, have permanent residency or meet other eligible noncitizen requirements.
• You must not be legally barred or suspended from taking part in federal programs.
• Your monthly recurring debt must not exceed 41% of your monthly income. However, if you have a credit score of 680 or above, the USDA may allow for higher debt ratios.
• You must be currently employed or be self-employed, with a history of dependable income, for at least 24 consecutive months.
• You must have a good credit history, with no accounts converted to collections in the last calendar year.

Property requirements:

• The home must be based in a rural area with a population of less than 35,000.
• The home must have no more than 2,000 square feet of living space.
• The property's market value must be less than the applicable area loan limit (our loan officers can explain what this means when you apply).
• The property you're interested in cannot include an in-ground swimming pool. (Darn!)
• The property cannot be income-producing — meaning you can't rent it out.
• Second homes or vacation homes are not eligible.

That's a lot to take in, we know.

USDA Loans are complex, but we're here to help. Movement Mortgage has more than 1,200 loan officers who can answer your questions, help you determine if you're qualified and make the home loan process easy. 

Connect with one of our loan officers in the area you're looking to buy. Or, if you're ready to start your application, you can do so online.