If you’re looking to buy a home in a rural or eligible suburban area, a USDA loan may allow you to buy a home with no down payment and at a low interest rate. Whether you’re browsing homes for sale in Lexington, Kentucky or Spokane, Washington, understanding how USDA mortgages work can help you find the right real estate and financing options. This Redfin article explains what USDA loans are, the requirements borrowers must meet, which homes qualify, and how to buy in eligible areas.
What is a USDA home loan and how does it work?
USDA loans are mortgages that help low- to moderate-income households purchase homes in eligible rural areas. Because this loan is USDA-backed, lenders are able to offer competitive interest rates and no down payment is required for qualified borrowers. USDA loans help these communities thrive and provide rural residents with a better quality of life by making homeownership more affordable for many families.
There are two main USDA mortgage programs.
Single-family Home Guarantee Loan Program offered by private lenders Single-family Home Direct Mortgage Loan offered by USDA
USDA Loan Process
The process of obtaining a USDA loan is similar to the mortgage process for other loans, but there are some notable changes. Here are some important differences to expect.
Work with an approved lender. Lenders must be USDA approved, so you should add that requirement when looking for a lender. Evaluation requirements. In addition to fair market value, the appraisal must ensure that the home meets USDA safety and livability standards. Target location. Your home search will be narrowed down to homes within your target area. Two-step approval. Loan approval may take some time as the loan must be approved by both the lender and USDA.
What types of homes qualify for USDA loans?
To qualify for a USDA loan, the property being financed must be your primary residence. Investment properties, farms, vacation homes, second homes, rental homes, etc. are not eligible. Eligible real estate includes agricultural structures such as barns and silos, but the real estate cannot be used primarily for income-producing or commercial purposes.
Additionally, the home must be located within a USDA-approved area. This area is determined by the USDA based on population size and other factors. Most of the areas covered are rural, but some suburban areas are also covered.
During the appraisal, the home must also meet certain guidelines set forth by the USDA. Among them are:
Structurally sound foundation Good roof Easy access from the road Functional heating and cooling electrical and plumbing systems Adequate well and septic system (if present)
Several types of homes can be financed with USDA loans, as long as you meet the eligibility requirements listed above. These homes include new and existing homes, manufactured homes, short sales, condos, townhouses, and foreclosures.
USDA Loan Borrower Requirements
In addition to property provisions, USDA loans have borrower requirements. Typically you will need to:
Meet income limits that vary by county and household size (typically limited to 115% of area median income). Have a stable and reliable income. To expedite approval, show a credit score of 640 or higher (lower scores may require additional documentation). Maintain a reasonable debt-to-income ratio.
How to find USDA approved homes for sale
Now that you know more about what to look for, you can use filters to search listing sites to narrow your results to the areas and property types you are interested in. We recommend working with a real estate agent who is familiar with USDA properties and can help you find the property that best suits your needs.
Once you find a home you like that you think meets all the requirements, you can check if it’s in an eligible area by entering the address on USDA’s Real Estate Eligibility Map.
Please note that the final determination of whether a home qualifies is made by USDA Rural Development during the loan review process.
Apply for a USDA loan
For single-family home warranty loans, you must apply with a USDA-approved financial institution. This financial institution works with Rural Development to handle the loan application process. For single-family direct home loans, you can submit your application to your local USDA state office.
>>Read “Mortgage Loan Types” to see how USDA loans compare to other options.
conclusion
Understanding what a USDA loan is can help you decide whether this type of mortgage fits your home buying goals. USDA-qualified homes are an excellent option for buyers looking to purchase in rural or qualified suburban areas. These loans are particularly attractive because they require no down payment and often have lower interest rates than traditional loans, making homeownership easier for qualified buyers.
