Everyone loves to be in on a secret. So if you’re interested in buying a home, you’ll probably be curious to know why The Mortgage Reports dubs USDA loans one of the best-kept secrets in the mortgage world. It’s simple: The guaranteed loans backed by the U.S. Department of Agriculture Rural Development (USDA) come with no down payment requirement, low mortgage rates, and an annual fee instead of insurance costs, but they comprise a surprisingly small percentage of the mortgage market. This may be because many would-be buyers are unfamiliar with the program or assume that it is only available for farming communities. The reality is very different. Whether you’re interested in purchasing a home in the country or the suburbs, it may be worth your while to learn how to find homes eligible for USDA loans.
Homes Eligible for USDA Loans
When determining whether a home is eligible for a USDA loan, there are a few different factors that go into the calculation. These include the type of USDA loan, the property’s location, and its characteristics.
Types of USDA Loans
As NerdWallet explains, there are actually two different types of USDA loans:
- Direct loans are aimed at very low- and low-income buyers who are unable to secure traditional financing and are in need of safe, sanitary housing. Issued by the USDA, these loans set strict limits on both the property and the borrower’s income level, but they can provide subsidies that bring interest rates as low as 1%.
- Guaranteed loans are intended for both low- and moderate-income borrowers seeking a primary residence. There are income limits, but they vary by location and family size. These loans work much like VA or FHA loans. They are issued by private lenders and guaranteed in part by the USDA so that borrowers can enjoy favorable loan terms.
Location, Location, Location
Upon hearing that USDA loans come with geographic restrictions, many aspiring homebuyers assume that these loans can only be used in agricultural communities. That is incorrect. While properties in busy metro areas are unlikely to qualify, many homes eligible for USDA loans can be found in the suburbs and smaller cities.
How do you discover if the area where you’re shopping has homes that meet the USDA’s geographic requirements? The USDA offers an eligibility website. There, you’ll find searchable maps that make it easy to locate qualifying areas. You can even search by address if you have a particular home in mind.
The USDA’s Requirements for a Property
What characteristics impact a property’s eligibility? To qualify for purchase with a direct loan from the USDA, a property has to meet the following requirements:
- The property must be in an eligible area.
- It must meet all government-imposed standards for development.
- It must meet the USDA’s minimum standards for water and wastewater systems.
- It must meet the USDA’s access requirements by being on an all-weather road maintained by an appropriate authority.
- The site of the home must be modest. The lot cannot be large enough to subdivide, and its value cannot exceed 30% of the property’s improved value.
- The home must be considered modest for the area and feature a reasonable square footage. It cannot have a market value that exceeds the local loan limit or have certain prohibited features.
- Income-producing lands or structures and swimming pools are prohibited.
What if the USDA’s guaranteed loans are a better fit for your situation? The property requirements for this form of financing are similar, but there are a few differences:
- The property must be in an eligible area.
- It must meet applicable zoning requirements.
- It must have adequate utilities and water and wastewater systems.
- It must be on a hard-surfaced road that is appropriately maintained.
- It must be must be predominately residential in character, design, and usage.
- The home must be modest. Here, that means it should be a home that a low- or moderate-income buyer can reasonably afford.
- Its economic life must equal or exceed the loan’s term.
- It may not include any income-producing land or structures.
Do you have questions about USDA loans? Would you like to know more about how to find homes that are eligible for this form of financing? Are you wondering if a USDA loan might be right for you? Turn to PrimeLending Twin Cities. We start the home financing process by listening to you and continue to provide personalized service throughout your journey so that you can feel confident that you’re getting a home loan that fits your needs. Whether you are buying, renovating, or refinancing, our team of loan experts can help. Contact us today to learn more.