by Nick Gromicko and Rob London
USDA loans are housing loans that are backed through the
Rural Housing Division of the U.S. Department of Agriculture
In the wake of the mortgage crisis in 2008 and 2009,
lenders have become more cautious, so it's harder for
home buyers, especially first-timers, to secure
financing, especially those with low incomes or little money for
a down payment. In response, the USDA has enacted changes that
made millions of borrowers eligible for their rural mortgage
programs, which have been around for decades. These loans are
primarily used to help low-income individuals and families
purchase homes in rural areas, given the challenges faced in
finding an affordable mortgage loan or deriving high income
in sparsely populated areas. Funds can be used to build, repair,
renovate or relocate a home, or to purchase and prepare sites,
including providing water and sewage facilities. If the borrower
defaults on payments, loan funds are still guaranteed to the
Eligibility of Applicants
The following factors affect eligibility for USDA
- Loans are restricted to borrowers in rural areas, although
many of the zip codes that qualify for USDA loans are in
relatively typical suburbs of major cities. The 2002 Farm
Bill defines a rural area as "any area other than (1) a city
or town that has a population of greater than 50,000 inhabitants,
and (2) the urbanized areas contiguous and adjacent to such a
city or town."
- Applicants for loans may have an income of up to 115% of the
median income for the area. If an income exceeds the maximum
mark, you may be able to make certain adjustments that will help
- Applicant families must currently be without adequate
housing, but be able to afford the mortgage payments, including
taxes and insurance. Copies of IRS tax filings from years prior
may be required, especially if the prospective borrower is
self-employed or has worked many jobs over the past few
- Applicants must have reasonable credit histories. Late
payments will appear on the credit history, as will bankruptcies,
repossessions and foreclosures.
- The amount loaned will also depend on the number of
dependents claimed by the applicant.
Eligibility of Housing
Housing must be modest in size, design and cost. Also,
houses constructed, purchased or rehabilitated must meet the
building code adopted by the state and the Housing and Community
Facilities Programs' (HCFP) thermal and site standards. New
manufactured housing must be permanently installed and meet the
manufactured housing construction and safety standards of the
U.S. Department of Housing and Urban Development
(HUD), as well as the HCFP's thermal and site
standards. Existing manufactured housing may not qualify
unless it is already financed with an HCFP direct or guaranteed
loan, or it is Real Estate-Owned (REO), formerly secured by an
HCFP direct or guaranteed loan.
USDA Loans vs. Federal Housing Authority
While the USDA and FHA both insure loans made by private
lenders, the policies and eligibility requirements for each are
quite different. The following are the principle
- Unlike loans offered by the FHA, USDA loans have no monthly
mortgage insurance premium.
- The FHA requires that an applicant invest 3.5% of the
purchase price as a down payment, although this fee may be
donated by an employer, a blood relative, or a non-profit
organization that is approved by HUD. The USDA does not
require a down payment.
- Both the USDA and FHA have similar appraisal requirements.
Both feature mortgage options for a fixed rate mortgage,
and repayment terms of 15 years and 30 years.
- FHA loans may be as high as $729,750, while USDA loans are
limited to $300,000.
In summary, USDA loans are a good option for many
prospective home buyers and borrowers living in (or moving
to) rural areas.