When To Consider A USDA Loan

If you’re buying a home, you’ll likely need a mortgage. There is a wide variety of loans, each with its requirements.

A homeowner commonly needs to contribute funds, known as a deposit.

The deposit is usually a percentage of the home’s total value, most often 20%. So, to open a mortgage on a loan for a home that’s sold for $400,000, you may need to pay $80,000 to start with.

USDA loans offer another alternative, however. What are they, how do they differ from the average home loan, and when should you consider them?

What are USDA loans?

The USDA Rural Development Guaranteed Housing Loan Program, administered by the United States Department of Agriculture, offers loans specifically for rural property owners. These loans allow homebuyers to finance closing costs and prepaid items, helping to reduce the immediate costs of buying a home. They can sometimes even be used to fund repairs and renovations to the property.

With competitive interest rates, no minimum cash requirement from the buyer, and zero deposit or down payment required, they can make rural property purchases much more accessible.

Differences between a USDA loan and other loans

The most significant defining difference between USDA loans and other traditional mortgages is that no deposits are required. This means home buyers don’t have to spend as much time saving up for a home before buying them. However, it is only eligible for rural properties. That said, according to the USDA, the definition of “rural” is bigger than you might think.

Suburban homes in major metropolitan areas can also qualify, usually modest in size and cost. To qualify as a borrower, you must earn up to 115% of the area median income and have a stable and dependable income to carry the mortgage debt.

When to consider a USDA loan

Suppose you have trouble raising funds to buy a home but meet the qualifying criteria of making 115% of the area median income or less. In that case, a USDA loan can make homeownership much more accessible.

What’s more, it can be a highly effective solution for those with a poor credit history or past issues like bankruptcy or foreclosure. However, these loans are not eligible for those looking to buy investment properties, as they are only granted for investment properties.

Unincorporated areas explained

The US is not the only country in which these kinds of loans are found.

Unincorporated areas in the US include American Samoa, Puerto Rico, and the US Virgin Islands. They can also be found in Australia, Canada, Germany, and Norway. These areas aren’t governed by local municipal corporations but are part of larger administrative divisions. In many of these areas, USDA loans can help homebuyers get a home for less.

USDA loans can be tremendously helpful for those who have trouble raising the deposit they need for a traditional home loan. However, you must ensure that you and the home you want to buy meet the qualifications.