Many homeowners have been talking about relocating, and it’s not a surprise after this past year. Some people want to cash out and head to the coastline, while others want to move where the cost of living is lower. Lately, I get asked whether or not the USDA loan would be a good fit for people considering rural areas.
If you’re thinking about leaving the mainstream and living in a more rural area, then you might have looked into USDA home loans. They offer a few great benefits like no-money-down and below-market interest rates, but there are also a handful of limitations. If your income is higher than average, you won’t qualify. But you might have friends who can get into a house they never dreamed would be possible. You could be the one to get them connected.
The Low Down on USDA Loans
The USDA loan didn’t come into play until the 1990s, so I’m not entirely surprised to find that many people haven’t heard of them. Fun fact, USDA loans are sometimes called “Section 502” loans, referring to section 502(h) of the 1949 Housing Act. At its core, the USDA loan lowers the financial barrier to homeownership and provides people an incentive to build a great life in less populated areas.
USDA Home Loans: How it Works
The USDA loan is a government-backed mortgage that typically offers below-market interest rates since it’s a lower risk to lenders.
USDA loans are also one of the few loan programs that require zero down payment, with the option to roll the closing costs into the loan amount. A typical USDA home loan is a 30-year fixed-rate loan. Some offer the ability to extend the loan term to 38 years.
The USDA loan requires homeowners to set up a fixed-rate loan term, so adjustable-rate mortgages are not available with the USDA loan program.
USDA Loan Requirements & Eligibility
To qualify for a USDA home loan, you’ll need to work with a USDA-approved lender. So, before you dig too far, contact a mortgage expert to find out if they are an approved lender for USDA home loans. An experienced mortgage expert will also answer your questions and customize a better loan program if the USDA home loan isn’t the best fit.
Defined by Population: USDA home loan requirements define a “rural area” as an area with less than 20,000 (up to 35,000 in some areas). Surprisingly, more than 95% of America qualifies. Check out the qualifying map.
Income Limits: Qualifying homeowners will make no more than 15% above the median income for the area. For example, if the median income in the area you want to buy is $62,000, you could qualify with an income of $71,300 or less.
Credit Score: Qualifying homeowners will typically have a credit score of 640 or higher in most cases for the USDA home loan.
Reasons You Might be Denied
If you meet most of the requirements above, there are a couple of common reasons that your application for a USDA home loan might get turned down.
- Lack of steady employment
- A credit score below 640
- Debt-to-income ratio too high (>40%)
These examples fall into what the USDA calls the ability to repay. In the eyes of the USDA, the new homeowner must meet the eligibility criteria and show evidence that they can repay the loan.
If you’re thinking about moving to a rural area and expanding your space, check in with a mortgage expert. An experienced mortgage broker will answer your questions about USDA loans and explain additional opportunities that might not be obvious. If you’re ready to make your next move, give us a call. We can help.