What Is a Rural Housing Loan and Its Key Benefits

A rural housing loan is a type of mortgage designed for low-income individuals and families living in rural areas. These loans are offered by the USDA and can be a game-changer for those who struggle to afford housing in these areas.

One of the key benefits of a rural housing loan is that it offers favorable interest rates and terms. For example, the USDA guarantees up to 100% of the loan amount, which means borrowers can purchase a home with no down payment.

These loans also offer lower mortgage insurance premiums compared to conventional loans. In fact, the USDA's mortgage insurance premium is just 1% of the loan amount upfront, which is significantly lower than the 3.5% premium for FHA loans.

Rural housing loans can also be used to purchase, build, or improve a home, making them a versatile option for rural homebuyers.

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To qualify for a rural housing loan, you'll need to meet certain requirements. Income limits are set at 115% of the median income for the area where you're buying, and your current housing must not be adequate or meet your needs.

You'll also need to demonstrate a willingness to repay the loan, with no current delinquencies on non-tax Federal Debt. This means your credit history will be reviewed, and past late payments, charge-offs, and other negative items over a year old may be overlooked.

Here are the key eligibility requirements:

To qualify for a USDA rural home loan, you must meet certain requirements. The income of all adult household members cannot exceed 115% of the median income for the area where you are buying.

The property must be located in an area that is marked "rural" by the USDA, but the eligible areas are more extensive than you might think. In fact, if a potential rural home buyer looks at 10 prospective homes, chances are good that 8 or 9 of those homes will be eligible for the USDA program.

To qualify for a USDA home loan, your current housing must not be adequate or no longer meet your needs, and you must be able to afford the mortgage payments, including insurance and taxes. You also cannot obtain a conventional loan.

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The USDA has a handy eligibility map that you can use to pinpoint properties that qualify for the program. Simply plug in the address of a property you're interested in, and the map will show you whether it meets the USDA's location requirements.

Here are the key USDA loan eligibility requirements:

The income limits imposed by the USDA are the second factor that could prevent a person from qualifying for a mortgage. Borrowers can be approved for the USDA home loan if their income is less than 115% of their area's median income.

The USDA's definition of "rural" isn't as narrow as you might expect. In Michigan, for example, USDA-eligible areas extend beyond traditional farmland and small towns.

The USDA uses debt-to-income calculations to determine if a borrower can afford a loan.

The proposed payment on the new loan should not be over 31% of the gross monthly income.

This calculation includes all of the borrower's debt payments, including the new loan payment.

The USDA's debt-to-income ratio guidelines are in line with those used for FHA loans.

This ensures that borrowers don't take on too much debt and that lenders have confidence in the borrower's ability to repay the loan.

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The USDA program is a great option for many homebuyers, but it's not without its restrictions.

One key restriction is that the loan cannot be used for an investment property. The borrower must live in the property as their primary home.

USDA home loans are also not allowed to be used for vacation homes. If you're looking to purchase a second home for vacations, this program isn't the right fit.

If you're looking to tap into your home's equity, you're out of luck with a USDA loan. USDA does not offer cash-out refinance loans.

Contrary to its name, the USDA program is designed for primary residences, not farms. If you're looking to finance a farm, you'll need to look for a different type of loan.

The program is not reserved just for first-time home buyers. If you've previously owned a home and meet the other requirements, you're still eligible to apply.

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The USDA Home Loan program offers a 1% upfront guarantee fee that can be rolled into the loan, which can be a huge help for those who want to buy a home but are struggling to save for a down payment.

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This program also doesn't require a down payment, which can be a game-changer for many people. The USDA Home Loan program has no prepayment penalties, so you won't be penalized if you decide to pay off your loan early.

The program has a yearly fee of 0.35% that's paid monthly, and it offers competitive 30-year fixed interest rates. There's no maximum loan amount, and you're not limited to cash contributions, which gives you more flexibility when it comes to buying a home.

Here are some key program details:

There are two main types of USDA loans: Guaranteed Loans and Direct Loans. Guaranteed Loans are the most common type and are designed for low- to moderate-income borrowers.

Guaranteed Loans have a 1% upfront guarantee fee that can be rolled into the loan, and a 0.35% yearly fee paid monthly. They also offer 100% financing to qualified buyers and allow for all closing costs to be either paid for by the seller or financed into the loan.

Here are the key differences between Guaranteed Loans and Direct Loans:

Direct Loans are primarily used to help low-income individuals or households purchase homes in rural areas, and funds can be used to build, repair, renovate, or relocate a home.

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Closing costs are a significant part of the homebuying process, and the USDA loan program offers some flexibility in how they can be handled.

These costs can add up quickly, totaling thousands of dollars, and include items like title insurance, recording fees, and homeowner's insurance.

The good news is that the seller can pay closing costs, or the buyer can receive a gift to cover them.

Here are the three options for paying closing costs in the USDA program:

If the buyer wants to negotiate with the seller to pay the closing costs, it's best to speak with a loan officer experienced with the USDA program to understand the limits.

The USDA home loan program has a rich history that dates back to the early 20th century when rural homes in the United States were often without basic amenities like indoor plumbing and electricity.

Poverty was at an all-time high during this time. The Housing Act of 1949 was a game-changer, declaring that every American deserves a "decent home and a suitable living environment." This act set the stage for the creation of the USDA home loan program.

To meet the goal of better and more abundant housing, the Housing Act established a framework for the program. The post-World War II era saw a shortage of housing, with many cities having houses in rapidly deteriorating condition. Certain home repairs and improvements may be included in the loan.

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The USDA eligibility map tool is a game-changer for homebuyers. Simply enter the property address, and it will indicate whether the home qualifies for USDA financing.

You can easily check if a property falls within a shaded area on the USDA eligibility map, which currently does not qualify for USDA financing. However, if the property is in an area marked "rural" by the USDA, it's likely eligible.

According to the USDA, areas with a population of 35,000 or less are considered "rural." This means that residents in adjacent towns and smaller cities could be eligible for USDA loans.

Approximately 109 million Americans live in areas that fall within USDA-eligible boundaries, which accounts for roughly one-third of the nation's total population. This is a staggering number, and it highlights the program's broader reach than many people assume.

The USDA eligibility map tool is a great resource for homebuyers to determine if a property qualifies for USDA financing.

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