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What is a USDA Loan?

by Vera Gleason 01/17/2021

Image by Free-Photos from Pixabay

If you're looking for loans with excellent interest rates, you may have heard the term USDA bandied about. This special type of loan is attractive on paper, but the reality is a little more complicated than what meets the eye. Learn more about what a USDA loan is meant to do, how to get one, and why the terms are so buyer-friendly. 

The Goal of the USDA 

The primary goal of a USDA loan is to infuse new life into rural communities. When people flock to cities, it causes rents to rise and small towns to crumble. A USDA loan is a way to entice Americans to renovate old homes and keep abandoned neighborhoods alive. These loans are backed by the government and issued by the lender. Because of the purpose behind the USDA, the applicant is judged more so on their general merits rather than their financial status. As long as the buyer is willing to commit to the property and the surrounding community, they're likely to be approved. 

Requirements of the USDA Loan 

Here are the key eligibility requirements for a USDA loan: 

  • Location: The majority of USDA properties will be in rural areas. You'll need to research the homes available under the USDA umbrella before applying for a loan. 
  • Credit score: The credit score minimum is ambiguous since the USDA loan is based on more than just straight financials. However, those with a credit score of at least 640 typically receive a fast-tracked application. This means fewer questions and underwriting from the lender and a nearly guaranteed approval. 
  • Down payment: USDA loans don't require a traditional down payment. However, you will need to pay 1% of the loan to the lender if putting down less than 20% of the total loan. 
  • Fees: There's a .35% fee every year for the entire course of the loan. The .35% is applied to the mortgage balance, meaning it decreases every year. 
  • Interest rates: The lender sets the interest rates for USDA loans, but they can go as low as 1% in some cases. 
  • Closing costs: Closing costs are typically between 1 and 3% of the total price of the home. 

It's worth noting that some USDA homes are in more populated areas, so you shouldn't assume a property is ineligible until you confirm. If you're unable to secure a USDA loan, you may want to consider an FHA loan. While the terms are not quite as attractive, FHA loans are also backed by the government. This gives people with lower credit scores a way to secure a property at a reasonable interest rate. 

About the Author
Author

Vera Gleason

I have been a Realtor® since 2004, helping buyers and sellers with their real estate needs. I’ve helped countless people realize their dream of owning a home, or to sell their home, and start a new phase of their lives. I am a full time professional, dedicated to excellent service. Communication is important and I listen carefully to my clients, and work closely with them to understand their individual needs. A professional should never stand still in business, and I am continually learning new information about the real estate market, law, procedures, and new products for my clients.