What is a USDA Loan?

What is a USDA Loan? 

Although buying a home is exciting, it can also be an overwhelming experience. Particularly if you're looking to purchase a home in a rural area, there are many financing options to consider. Whether you're a first-time home buyer or you've bought a property before, you may not know about USDA loans and how they are designed to help people purchase a home with zero money down. Since USDA loans are among the least-known mortgage assistance programs, we want to provide you with all the information you need to make an informed decision.

USDA mortgages offer considerable benefits for those wishing to buy a home in an eligible rural area. Although these loans are issued through private lenders, they are guaranteed by the United States Department of Agriculture (USDA).

What Are the Requirements?

One of the primary differences between USDA loans and many other types of mortgages is that the USDA has its own requirements for the property as well as the buyer. To qualify for a USDA loan, home buyers must meet certain credit and income criteria, and the property they want to purchase must meet some basic qualifications as well. Basic requirements to qualify include:
  • Buyer must be a U.S. Citizen or have permanent residency in the United States
  • Buyer must have a dependable income for at least two consecutive years
  • Buyer must meet USDA income eligibility requirements
  • Buyer cannot have a history of late payments or collections in the 12 months prior to the application
  • Buyer must have an acceptable debt-to-income ratio (Your debt-to-income ratio is all your monthly debt payments divided by your gross monthly income. Acceptable limits can vary by lender.)
  • Property must be located in an eligible rural area
  • Property must be your primary residence and meet all program criteria

What Do You Need for Supporting Documents?

To qualify for a USDA loan, the process is similar to any other type of financial investment procedure. You must be able to prove your income and credit details through supporting documentation. Here is a list of items you may need to provide during the application process:
  • Credit information
  • Driver's license & social security card
  • Two years of complete tax returns
  • Two years of W-2, 1099, or other income statements
  • Most recent month of pay stubs
  • Most recent three months of bank statements
  • Bankruptcy and discharge papers (if applicable)
  • Contact information of your landlord (if applicable)

What Are the Benefits of a USDA Loan?

Since the USDA guarantees the loan, lenders are willing to take on more risk to issue loans to eligible home buyers, which means homeownership is a possibility for many first-time home buyers that do not have a down payment. Additional benefits of USDA loans include:
  • 100% financing with no money down
  • Competitive interest rates
  • Flexible underwriting criteria
  • Ability to finance closing costs
  • Low mortgage insurance premiums

What Could Make the Process Difficult?

Your income and credit history do play a role in determining your eligibility for a USDA loan, which is why a history of timely payments and steady income can improve your chances for approval. However, there are a few things that can have a negative impact on your eligibility. 
  • No credit history
  • Past foreclosure
  • Recent bankruptcy
  • Recent late payments
  • Federal debt
  • Collections or judgments

What Happens at Closing?

Once your loan is approved and you've reached your closing date, you may be required to provide some additional documentation, including:
  • Identification
  • Title insurance policy
  • Homeowner's insurance policy
  • Closing funds in the form of a cashier's check or electronic wire

That's a lot of information about USDA loans! But don't worry our mortgage lenders are here to walk you through the process step by step. If you think a USDA home loan may be right for you, contact us to start a free consultation.

Even if a USDA loan is not the right fit for your situation, there are other options available, and we'd like to help. Contact us to speak with one of our mortgage lenders today!

Lincoln Savings Bank, Member FDIC
Equal Housing Lender