The United States Department of Agriculture was created in order to improve the qualify of life in rural areas as well as provide a way for urban and suburban citizens to more easily finance homes in underpopulated areas. The USDA loan program allowed people to buy and finance a home with no down payment, creating a demand for these loans where most loans could not work.
Conventional mortgages make up the vast majority of home loans issued today but they also need to be placed where other residential properties exist. Ideally, there should be at least three such similar properties in the area less than one mile away. In rural areas, that’s not possible in most cases. USDA loan program guidelines for these “comparable sales” are a bit more lenient and take into consideration that rural housing needs financing just as those homes in urban areas. USDA loan program also carries an inherent guarantee to the lender should the loan ever go into default.
How it Works
Homes must be located in preapproved areas. If the home is not located in an approved zone, the USDA loan program cannot be used. No exceptions. How are these areas approved and who approves them? Every 10 years the United States Census Bureau conducts a national census. These questionnaires go out to each household and are asked to complete the information and return it to the Bureau. In areas where there are very few people living there, the Bureau designates it as rural. Being designated rural automatically opens up several programs consumers can take advantage of, including the USDA home loan.
How does one find out if a home located in a rural area is in an approved zone? The consumer will take down the address of the selected property and provide it to the lender. The lender then researches the database established by the Bureau. If the property is located in an approved zone, the consumer is notified. This research really only takes a few minutes, just enough time to enter in the property’s address.
USDA loans are processed and approved much like any other loan program. Besides the location of the property, minimum credit standards apply. Most lenders like to see a minimum credit score for a USDA loan program to be near 640 although sometimes exceptions can be made. Lenders order a score from each of the three main credit repositories, Experian, Equifax and TransUnion. Of these three scores, the lender will use the middle score, ignoring the highest and lowest. If there is more than one person on the application, the lowest of the middle scores is the qualifying score.
There are also household income limitations. This includes household members who will occupy the property but not appear on the loan application. This applies to all household members 18 years of age and older. The limit must not exceed 115 percent of the median income for the area.
Credit, income and location are the primary requirements. However, many might be surprised where a USDA loan program can be used. Precisely because the Bureau only performs the census once every 10 years, urban sprawl and slowly creep into unpopulated areas. The last census was taken in 2010 and the next one taken next year. This means an area may still be declared rural where in fact it appears anything but. Don’t judge a potential property on your own. Contact your loan officer with the address to find out for sure. You might just have a brand new, zero down loan available.