What is a USDA home loan?
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UPDATED: Oct 30, 2012
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A USDA home loan is a mortgage insured by the United States Department of Agriculture. Since the mortgage is insured by the government, lenders—such as banks and credit unions—are more inclined to offer better interest rates and options to borrowers. The federal government and USDA do not lend the mortgages but rather simply insure them for lenders.
Since USDA mortgages make up a small percentage of government-insured financing, they do not typically appear in home loan news. Regardless, they are highly beneficial to prospective homeowners that achieve approval.
USDA home loans are for moderate to low-income borrowers. Some of the benefits of USDA mortgages include:
- Zero money down requirements
- No mortgage insurance requirements
- Flexible credit criteria
- Seller paid closing costs
The USDA does not put restrictions on previous homeownership, so both new and previous buyers can apply to see if they will obtain a USDA mortgage. However, the federal government does require that a borrower’s desired is in a rural area. The USDA typically stipulates this to mean homes in areas which have a population of less than 20,000.
The debt-to-income ratio of applicants is a very important deciding factor in the approval process. No matter how generous USDA mortgage benefits are, lenders will not grant approval for an applicant that has either too much debt or too little income. Additionally, lenders will evaluate whether an applicant has a credit score that is sufficient for borrowing a USDA mortgage.
All mortgages insured by the USDA carry fixed interest rates. This means that borrowers will have to make steady and stable monthly payments since the interest rate on their home loan will not increase or decrease. Borrowers will be in a better position to plan and budget their finances with fixed interest rates.
Borrowers are able to view their eligibility for a USDA mortgage at the USDA website. Unfortunately, simply meeting USDA standards does not mean that a borrower is going to be approved for a mortgage. Individual lenders have different criteria for deciding who is and is not eligible for a USDA mortgage. Comparing lenders and speaking to representatives is an excellent way to check the specific requirements at various financial institutions.