If you're considering buying a house, it's helpful to have an understanding of all the types of loans available to you. One option that appeals to many homebuyers is the USDA loan. If you're wondering why this loan is so sought after and what it takes to qualify for it, check out the basics of this loan. Then take a look at what makes a USDA loan different from the other home loans on the market.
What is a USDA loan?
A USDA loan is a government-backed home loan offered by the United States Department of Agriculture. The point of this type of loan is to make it possible for low-income buyers to purchase a house they can afford, since USDA loans come with low interest rates, a zero-down payment and relaxed income and credit requirements.
The USDA Rural Development Guaranteed Housing Loan Program is in charge of issuing USDA loans, so it's important to note that the house you buy with this loan needs to be in a rural area. This means homes in any big city won't qualify, but if you're willing to look in more rural areas of your state, you have a good chance of getting a USDA loan.
What are the requirements for USDA Loans?
USDA loans are known for being easier to qualify for than most other home loans. But like any other loan, they still have a few strict requirements that you must meet in order to qualify. For example, you must be a US citizen or permanent resident who meets the income requirements in your area, which means you cannot make more than 15 percent of the median household income in your county. You can check the median household income for your county on the USDA's website to determine if your income qualifies you for this type of loan.
If you make less than the specified amount for your area, make sure you have proof, such as tax returns, of two years or more of steady income. Also, although there isn't technically a minimum credit score for USDA loans, 640 is the lowest score you can have if you want your application to be automatically approved. If it's lower than that, you may be able to be manually approved based on the rest of your application.
Now that you know whether you qualify for a USDA loan, you need to make sure the house you want does, too. First, as mentioned above, it needs to be in a rural area that qualifies. You can put in the address of the house you want on the USDA website to make sure it qualifies for the loan. As long as you don't want to live in the middle of a big city, it shouldn't be hard to find a house you can buy with this loan. And once you do, take note that it needs to be your primary residence, not a vacation home or investment property. In addition, most homes that qualify for USDA loans cannot be more than about 2,000 square feet, nor can they have luxury features like a swimming pool.
How do they compare to other home loans?
If you're in the market for a house, you've likely looked at a few different loans for which you might qualify. So what makes a USDA loan worth pursuing? One of the details setting them apart is that they are easier for most buyers to get due to the reduced income and credit score requirements. They also require zero money down. By contrast, conventional home loans usually require a good credit score and 20 percent down. So if you're worried you won't meet the requirements for a conventional home loan and don't have the money upfront for a large down payment, USDA loans may be appealing to you.
Another type of loan that is often compared to the USDA loan is the FHA loan. Unlike USDA loans, FHA loans do not require you to live in a rural area, so if you're looking for a house in the city, this might be your best bet. FHA loans also have lenient credit requirements. However, they do require at least 3.5 percent of the home's total as a down payment, or 10 percent if your credit score is 580 or lower.
If you have served in the military, you might qualify for a VA loan. Like USDA loans, VA loans do not require a down payment, and they are lenient on credit and income requirements. But they do come with some fees that other loans do not have, and there is a loan limit of $417,000 in most markets.
If you're not sure if you qualify for a USDA loan, or if there is a better loan option out there for you, come to Contour Mortgage for assistance. We can help you determine if you meet the eligibility requirements for USDA loans. We can also answer any questions you have about home loans in general. Call Contour Mortgage today at 888-403-0505 to learn more.