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How does a USDA loan work, and do I qualify for one?

A rural home with the text "How Does a USDA Loan Work" superimposed over it.

It’s no secret that purchasing a home is an expensive and time-consuming process. There are costs at nearly every step of the way—not to mention the fact that homes are simply not cheap. That’s why it is so important to get an affordable loan.

A USDA loan could be your ticket to an affordable loan and the home of your dreams—if you and the home you’re interested in qualify, that is. What is a USDA loan? How do you qualify for it? What are its benefits? And how do you apply? Here at Landmark National Bank, we’ve got all these answers for you and more.

What is a USDA Loan?

A USDA loan is a home loan guaranteed by the United States Department of Agriculture. Being backed by the government allows USDA loans to have lower interest rates and lower down payment requirements than conventional loans.

Other government-backed loans include VA loans and FHA loans, which are backed by Veterans Affairs and the Federal Housing Administration, respectively.

USDA loans are available to fewer people than other government-backed loans due to relatively stringent restrictions. Borrowers and the homes they are purchasing must qualify for the loan separately.

Additionally, since USDA loans are intended to assist those in more rural areas, they are not eligible in most urban and suburban areas. You can view location eligibility on the USDA website.

What are the Benefits of a USDA Loan?

The USDA loan enjoys multiple benefits over other loan types thanks to its stringent requirements and government backing, which allow lenders to offer highly competitive loans and terms that can’t be matched with other loans. Some of the main benefits include:

  • Little or no down payment—Guaranteed USDA loans do not require a down payment. While this results in higher monthly payments, it lowers the initial bar for homeownership.
  • Low credit score requirements—Applicants with a credit score of 640 or higher qualify for automatic approval via the USDA’s automated underwriting system.
  • Refinancing eligibility—Loans can be refinanced into a USDA loan, thereby potentially lowering your monthly payment.
  • Low and fixed interest rates—USDA loans are available with low and fixed interest rates that vary by lender.

Do USDA Loans Have PMI?

No, USDA loans do not require private mortgage insurance, or PMI, as PMI only applies to conventional loans. However, USDA loans do have two types of fees that function similarly to PMI.

The first is called an upfront guarantee fee, which equals 1 percent of the total loan amount. The second fee is called the annual fee, which equals 0.35 percent of the loan amount. The upfront fee is paid at closing and is rolled into the loan amount, while the annual fee is calculated once per year and then divided into monthly payments along with other monthly costs.

These fees are levied no matter if you pay 0 percent down or 20 percent down. However, these fees are usually cheaper than PMI attached to a conventional loan.

How to Qualify for a USDA Loan

Should your would-be home reside in a rural area that is eligible for a USDA loan, you’ll still have to meet other requirements in order to qualify for a USDA loan. There are requirements for both applicants and the property itself. Additional requirements may also be implemented by each lender that offers USDA loans.

USDA Loan Requirements for Borrowers

  • Income—Applicants will not be considered if they exceed 115 percent of the home location’s median household income.
  • Citizenship—Applicants must be a U.S. Citizen, non-citizen national, or Qualified Alien.
  • Creditworthiness and Income—Applicants must be creditworthy and have the ability to pay the mortgage, and must supply evidence (IE employment history, payment history, etc.).

USDA Loan Requirements for the Property

  • Purpose—Properties purchased via USDA loans must be used as a primary residence.
  • Accessibility—Properties purchased via USDA loans must have direct access to a street, road, or driveway.
  • Utilities—Properties purchased via USDA loans must have functioning utilities, including wastewater disposal.

How to Apply for a USDA Loan

Applying for a USDA loan is easy. To find out additional information about the USDA loan and to see if you can qualify, you can contact your local USDA Rural Development field office for more information.

Additionally, for residents of Kansas and Missouri interested in securing a USDA loan for a purchase of a rural home, you can simply contact your local Landmark National Bank location. Our dedicated loan and mortgage officers will work directly with you to help you determine if you and the home of your dreams qualify for a USDA loan. Even if that’s not the case, we can help you with other home loans at competitive rates.

Homeownership is the American dream, and it’s achievable with the help of the right financial institution. Landmark National Bank is here to help.

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