The US Department of Agriculture (USDA) offers development loans in rural areas. The loans are referred to as USDA loans or simply USDA Rural Development Loans (RD Loans). The purpose of the loan is to promote safe living standards among the rural poor.
Types of USDA loans
There are two broad types of loans, direct and guaranteed loans.
Direct loans
USDA loan officers tour various rural areas to determine the living conditions among local communities. If they find people living in a deplorable state, they sensitize people about the availability of the loan facility. You must apply for the loan for you to be considered for it. USDA processes and grants the loan without using the services of banks.
The process of applying a direct loan is simple
- Check eligibility of the home you want
- Check your qualification as a borrower
- Make an offer for the house
- Apply for the loan
- Get approval
- Direct loans fall under two categories.
Repair and rehabilitation
This loan targets restoration after a hazard or in light of a pressing need. After fires, storms, floods, or disease outbreak, communities living within the area are always in urgent need of restoration; USDA offers loans to families to repair their homes. Water and environment loans are part of this program.
Grants
Senior citizens with little or no capacity to service loans get grants from USDA to facilitate safe living conditions. The grants are given to people above the age of 60 whose income is below 50% of the AMI.
Guaranteed loans
Lending institutions mandated to offer USDA-approved loans give out this loan. All USDA does is to back the lender. The lending firm does all the paperwork. USDA closes the loans after verification of eligibility and criteria. People living in 97% of US land mass are eligible for this loan, but not all can access it.
The process of acquiring a USDA guaranteed loan is simple:
- Apply for a loan at an USDA-approved outlet
- The outlet pre-approves your loan
- Go house shopping and make an offer for the suitable house
- Get lender approval
- USDA signs off the loan documents and submits to USDA for approval
- Approval of the loan
Characteristics of the loan
No down payment required — 100% financing.
Only owner-occupied properties are eligible for this loan facility.
The financed property must be in a rural area — 97% of US land mass is classified as rural.
Loan eligibility is based on county average median income (AMI).
The rate offered by USDA is lower than what mainstream lenders with a down payment of 3 or 5% offer.
Eligibility criteria
Though about 100 million Americans live are designated rural, not all of them qualify for the facility. The three most important attributes that will make you eligible are listed below.
Very low-income earners
This class of people earns <50% of the AMI, which makes them qualify as very poor. They automatically qualify if they live in rural-designated places/homes and have a decent credit score. Some income is also necessary because these are loans that must be repaid.
Low-income earners
People earning less than 80% of the county AMI can access these loans if they satisfy the criteria above, too. Sometimes the loans are given on a competitive basis with this subset losing out if there are more applicants in the very low-income category. People in this category who have a 20% down cannot qualify for the loan.
Inability to access credit elsewhere
This is an important quality among low-income earners with less-than-pristine credit scores. Their inability to get loans elsewhere qualifies them for USDA loans. People earning up to 115% of the county AMI may be eligible under this rule.
What you can do with the loan
- Build — new homes and developments can be funded.
- Repair — you can restore an existing home to its former glory. Derelicts can also be given a facelift.
- Relocate a home — a home standing in a compromised area can be relocated to safer ground.
- Purchase and prepare sites — you can buy new sites for a building if you don’t have a place to build.
- Remove safety and health hazards — sewer lines and other water-related sanitation can be developed, repaired of moved appropriately.
Most people have no idea that USDA loans exist. In fact, there are myths about them. Contrary to popular belief, you can use the USDA mortgage to construct condominiums and townhouses, not just single-family units. However, the mortgage should not fund investment properties.
USDA calculates the income of everyone within the household including a working teenage son/daughter, senior citizen, and spouse. No one is left out, which can increase the household income and disqualify you from the loan.
This loan facility is great for the people earning low incomes. Always confirm your eligibility for the USDA mortgage before committing to a conventional one.
