The USDA guaranteed loan program is a 100% (Zero Down Payment) financing option available for eligible buyers of rural single-family residential properties. USDA rural home financing programs are available for low and moderate income rural borrowers looking to purchase or refinance a residential properties in rural areas. The primary goal of these various USDA loan programs is to make it affordable for residents living in rural areas to secure necessary financing towards buying a home. Rural areas, according to USDA lending guidelines, are those communities in the open country with populations less than 10,000. Even towns and cities that have population between 10,000 to 25,000 are also considered to be eligible rural areas, provided they meet certain requirements.
USDA (Section 502) Rural Home Loan Guarantee Program
The USDA’s Rural Development (RD) division provides the loan guarantee assurance under its Section 502 mortgage program.
The primary requirements for securing under the section 502 guarantee program are the following:
- The property must be located in an eligible rural area. The property eligibility for USDA loans can be confirmed by checking out the USDA loan map.
- The residential home must be single-family property. Multi-family residential properties with two to four units do not qualify.
- The financing can be used for a number of purposes. The USDA section 502 loan guidelines allow for building, repairing, renovation or relocation an eligible single-family residential home. The financing may also be used to purchase and then for their preparation. Essential facilities such as water and sewage can be financed through this USDA RD guarantee loan program.
- The USDA lenders that handle most aspects related to loan underwriting and financing are also qualified to receive favorable consideration under the provisions of the Community Reinvestment Act (CRA).
- Up to 90% of the loan amount is specifically guaranteed again any losses. This guarantee allows USDA lenders against any losses they may incur due to borrower default on loan repayments.
How does the USDA Rural Guarantee Work?
The USDA Rural Guarantee allows mortgage lenders to confidently and safely provide financing to eligible rural borrowers of single-family residential homes.
In the event of loan non-performance, up to 90% of the original loan amount is reimbursed to the lender. As this guarantee comes with the full faith and assurance of the U.S. government, USDA lenders can underwrite and finance loans that meet the USDA RD lending guidelines without any fear of significant losses.
The safety net is actually much better than what the previous statement indicates. Any loss up to 35% of the loan amount is fully reimbursed. The amount exceeding 35% is reimbursed at 85%. As most non-performing home loans rarely exceed 35% loss, the lenders are pretty much 100% insured against any loan losses they may incur from funding a USDA Section 502 Loan.
USDA RD Section 502 Eligibility Guidelines
The applicants for a USDA guaranteed rural loan can have an income that is no more than 115% of the median income for the area in which the property is located. The maximum income limit for a USDA loan is a strict requirement. The income of all the borrowers applying for a USDA mortgage are included when calculating the income limit.
The families applying for a Section 502 loan must be able to afford the payments. This include the mortgage repayment amounts and the taxes along with home insurance payments.
While credit requirements are not as high as those required to secure conventional residential loans, the USDA loan guidelines still require the borrowers to have reasonable credit history and acceptable credit score. The USDA lender underwriting the loan may also require a high standard of credit history and credit score than the minimum guidelines required by USDA for their rural housing loans.
The borrowers are not required to be first time home buyers. However, the property should be intended as their primary residence. USDA guidelines do not allow financing for investment properties.
Property Eligibility Guidelines for USDA guaranteed loan
- The single-family home must be located in a USDA designated rural area. The loan map on the USDA site provides all the USDA eligible rural areas.
- The property must be modest when it comes to size, design and cost. The property whether being purchased or intended as a renovation must meet or exceed all the local and state building code requirements. The property must meet the minimum thermal and site standards set by the Housing and Community Facilities Program guidelines.
- Manufactured homes must be affixed permanently to their foundation and must meet the HCFP and HUD manufactured home standards. Existing manufactured homes are not eligible for USDA guaranteed financing unless the property already has USDA guaranteed or direct financing. This also applies to REO (USDA repossessed) homes.
USDA Guaranteed Loan Terms and Conditions
- A fixed 30-year loan is the only loan type available for USDA guaranteed program. The interest rate is determined by the lender underwriting and funding the USDA loan according to the agency’s program guidelines and requirements.
- The responsibility to determine borrower eligibility regarding loan repayment and affordability based on the program’s income ratios and limits falls solely on the lender. An USDA lender must carefully asses the borrower’s income and then factor in the monthly payments based on the new loan’s monthly repayment amount, taxes, insurance and other existing debt.
- The maximum loan amount can be up to 100% of the appraised value. This makes USDA Section 502 guaranteed loan program the only true zero-down payment, 100% residential loan program available to rural home buyers.
Finding USDA Lenders
The USDA loan programs can only be availed through USDA approved mortgage lenders. Currently, any lending institution that is a supervised lender already participating in the USDA RD and/or Farm Service Agency lending programs can originate USDA guaranteed loans. Additionally HUD approved lenders eligible for originating FHA insured loans or Ginne Mae backed loans are also eligible.