A few months ago, I sold my home and moved across the country. When I sat down with a real estate agent to discuss the possibilities, one of the most encouraging things she told me was that our home met the requirements for the USDA loan program. Due to the nature of the USDA loan program, this was a selling point for our home — especially since comparable homes for sale in our neighborhood didn’t qualify.
What is the USDA Loan Program?
The loan program most often referred to as the USDA loan program is officially the USDA Rural Development Single Family Housing Guaranteed Loan Program. The government encourages low to middle income homebuyers to make purchases in rural areas to help with development, and to provide more opportunities for homeownership.
As with other government loan programs, the loans don’t actually come from the government. Instead, local lenders agree to make the loans, and the government guarantees the loans. That way, if you don’t make your payment, the government backs the loan so that the lender isn’t taking such a big risk. Some of the features that make a USDA home loan desirable to homebuyers include:
- No down payment is required; you can finance 100 percent of the purchase price.
- The guarantee fee charged by the program can be rolled into the loan.
- Credit guidelines are a little looser, and those with non-traditional credit profiles can qualify for a USDA home loan.
- A number of home types are possible, including existing home and new-built homes, new manufactured homes, and certain condos.
- You don’t have to be a first-time homebuyer.
Not only do these features make a USDA home loan attractive to borrowers, but sellers can also benefit. This is due to the fact that being in a USDA-qualified area means that you will have a wider pool of homebuyers to choose from, since it’s easier to afford a USDA home loan.
USDA Loan Program Eligibility
First of all, it’s important that the home in question be located in an eligible area. There are boundaries. Our home was located on the street that marked the dividing line. We were on the western side of the street, and considered in the “rural” area. Across the street, on the eastern side, the homes did not qualify. This meant that there were homes in our subdivision — including a comparable home for sale around the corner — that didn’t meet the requirements and couldn’t be purchased with a USDA home loan.
Once you recognize that the property is in an eligible location, it’s time to see if you qualify for a USDA home loan. Qualifying ratios are a little more flexible with a USDA home loan. You can get one of these mortgages if you have 29 percent of your income going to housing costs, and no more than 41 percent total debt. (Contrast this 29/41 qualifying ratio to the industry-accepted qualifying ratio of 28/36.) As long as the income and qualifying ratios line up, it’s possible that you will be able to buy a qualifying home. There are no maximum purchase prices, either, since affordability is determined entirely based on the qualifying ratio and the applicant’s income.
The USDA home loan is ideal for someone who doesn’t have a lot of money for a down payment, and who might not have a long-established credit history. As long as you have adequate income, reasonably low total debt, and are willing to live in an area considered “rural,” this can be a great program.
And, for a seller, being located in a USDA friendly area can provide an advantage. The couple that bought our home was also looking at a very similar home just around the corner. However, the fact that are home qualified for USDA financing and the other did not went a long way toward swaying the buyers in our favor. The program provided a situation that worked out for everyone involved.