USDA loans were created by the United States Department of Agriculture (USDA) to improve the quality of life in American rural communities. The Department of Agriculture plays a financial role in making funding available to develop rural areas of the country. This has allowed first-time homeowners and home buyers who may not qualify for a traditional loan to use this program to buy a house as USDA loans do not require a down payment and have low, fixed interest rates.
What is USDA?
USDA stands for the United States Department of Agriculture, which is a cabinet department of the Executive Branch of the US government. It is currently headed by Sonny Perdue, who was sworn in as the 31st Secretary of Agriculture in April of 2017. The Department of Agriculture’s mission is to constantly invest in infrastructures, businesses, and people to keep food production and processing up-to-date. Since these activities often take place in out-of-the-way rural places, USDA loans were created to encourage individuals to take part in the rural economy.
In order to qualify for USDA eligibility, you must meet the following requirements:
While USDA loans have no down payment requirements, applicants with assets higher than the USDA standard limits may be required to use some of their own money upfront.
While the process to apply for a USDA loan is similar to what you would go through with a traditional loan, you’ll need to gather specific eligibility documents and financial statements before you can get started. According to the United States Department of Agriculture, required documentation can include:
A credit report: Like any other loan, USDA loans require good or decent credit.
Proof of citizenship: You’ll need to prove your citizenship, either with a social security number, birth certificate, or some other type of documentation.
Identification: A driver’s license or another government-issued form of identification is required.
Proof of intent to occupy: To qualify for a USDA loan, you must intend to treat the home as your primary residence.
Financial information: Plan to share intimate details of your financial state, including household members, income, expenses, and debt. You will also need to supply bank statements and any other financial statements required by your lender.
Before you apply for a USDA loan, you should consider getting pre-qualified and pre-approved. During this process, your lender will verify your eligibility and calculate your maximum loan amount before you begin searching for a home.To become pre-approved, you’ll need to work with a USDA-approved lender who is certified to offer USDA loans. During your initial interview, the lender will assess your financial situation to determine eligibility. To qualify for a rural development, you need:
To be a U.S. citizen
To be unable to qualify for traditional home financing
A monthly payment (including principal, interest, taxes, and insurance) that is less than 29 percent of your monthly income
24 months of proven work history at minimum
Good or decent credit, with no accounts in default or collections
As you search for a property that’s acceptable for a rural housing loan, keep in mind that metropolitan areas are generally excluded. You may find a rural area in or around a suburb of a larger city, however. The best way to search for areas with USDA-eligible homes is to explore the Rural Development Agency’s website. On the website, you can search by zip code or city to find areas where USDA loans may be accepted.Also, keep in mind how the USDA defines a rural area:
Open country that is not part of, or associated with, an urban area
Any town, village, city, or place, including the immediately adjacent densely settled area, which is not part of, or associated with, an urban area
Is rural in character with a population of less than 10,000
Is not contained within an MSA and has a population above 10,000, but below 20,000, and has a serious lack of mortgage credit for lower and moderate-income families
Once you’re ready to see eligible homes in person, it’s time to select a realtor. Since you’re considering specific properties that must meet USDA eligibility requirements, it’s crucial to work with a realtor who has experience with USDA loans.Make sure to see as many eligible homes as possible, taking special care to inspect the homes for quality of craftsmanship, potential problems, and suitability. Since you should be pre-approved for a USDA loan at this point, your realtor can also help steer you toward properties that fit within your pre-approved price range.
Once you find the home you’ve been dreaming of, you’ll sit down with your realtor to write a formal offer. Depending on the situation, you may offer less than the asking price or cite specific terms for the home sale.
It’s possible the homeowner will accept your offer outright, but counter-offers are also common. Either way, plan on negotiating back and forth with the seller (via your realtor) until an agreement is reached.
Just as if you were buying a home with traditional financing, you’ll need to set up a home inspection for the property you intend to buy. Make sure you hire a home inspector who is familiar with the Rural Development Agency’s standards. If you’re unsure how to find one, your realtor or USDA-approved lender should be able to help.Since USDA loans offer special protections from the federal government, homes must be inspected thoroughly for qualification. As the USDA notes, homes that qualify must be:
Modest in size, design, and cost
Able to provide safe and sanitary living conditions
Able to meet specific government-mandated thermal requirements
Free of hazards
Low maintenance, without a need for ongoing or excessive upkeep
While it’s common for USDA homes to need repairs, major repairs will need to be completed by the seller before a rural development loan can be processed.
While the closing process for USDA loans is similar to that of a traditional loan, the Rural Development Agency does impose an extra requirement for individuals participating in this program. Per the Rural Development Agency, new homebuyers who use USDA loans are required to complete homeowner education training prior to the closing of their home.Once you’ve finished your training, and provided the home you’ve chosen meets USDA eligibility requirements, you may be ready to close your loan. Since you’re already working with a USDA-approved lender, the team of professionals you’ve selected will help with this final step.
Outside of special circumstances, the closing process is simple. You’ll meet at your realtor or title company office, look over final closing documents for your loan, sign final documents, and close the loan. Make sure to read through all paperwork regarding your loan and home sale, taking special care to check for typos and mistakes. Once closing is completed and you’ve signed all required paperwork, you’ll receive the keys to your property and assume ownership.