Although it is not just for first-time homebuyers, the USDA Rural Loan is a great choice for those who are new to the home buying process. Lenient underwriting standards and a simple approval process make it easier for those from unconventional backgrounds to achieve homeownership. With a changing economy, the mortgage industry also had to make necessary adjustments to accommodate buyers from scenarios that are unique to the new generations. The emphasis on excellent credit isn’t as important as it once was. Borrowers today aren’t even required to have as much reserves as they did ten or twenty years ago. The USDA Rural Loan advantages prospective buyers who can afford a house payment but whose credit and assets may not be as substantial.
The USDA Rural Loan is backed by a government sector called the U.S. Department of Agriculture (USDA.) The Rural Loan program was developed in the 1990s as a way to boost economies in rural areas of the U.S. and provide safe, affordable housing for Americans residing, or wishing to live, in these designated areas. The USDA has been committed to building and supporting these economies since its inception. The USDA not only has a hand in helping rural Americans with housing, but they are also involved with the farming, climate solutions, recreation, and health and safety, to name a few. Every USDA program is centered around improving and maintaining the quality of life in the United States.
The Rural Loan program makes homeownership possible for countless Americans that would not have been approved for a mortgage in the past. Credit requirements are much looser— where other mortgage programs only accept borrowers with credit score in the upper 600s, the USDA Rural Loan will approve prospective buyers with scores as low as 620. This is an important feature because due to changing financial situations, rising cost of living, and influx of student loan debt among the younger generations, credit is being established at an earlier age and scores are receiving more negative marks than were experienced by the previous generations. The USDA Rural Loan forgives past derogatory credit events such as late payments, collections, and even chargeoffs and bankruptcies. Foreclosures are overlooked after a short waiting period after discharge, so those who have lost their home in the past have the opportunity to own a home again.
First-time homebuyers are often millennials who are just entering the workforce, starting a family, and wishing to buy their own home. Or they can be people who have chosen to rent for a number of years and now want to own their own property. If they don’t have much credit established, it’s not a hindrance when applying for a USDA Rural Loan. Lenders want buyers to have at least two lines of credit that have been maintained for twelve months, but if this isn’t possible, alternative lines of credit such as regularly paid utility bills and phone bills in the borrowers name can be considered in lieu of traditional ones that are reported to the bureaus.
Income is a common setback for hopeful mortgage applicants. Many loan programs require high incomes to cover the mortgage and monthly obligations as well as any unexpected expenses that may arise. The USDA Rural Loan does set debt-to-income guidelines, but instead of requiring a certain income, borrowers’ incomes must not exceed a particular amount. Since the Rural Loan is only valid on properties in designated rural areas, the income qualifications are skewed in favor of lower-to-moderate earners. The USDA wants to ensure that those who can benefit most from the great features of the Rural Loan are the ones who have access to it.
Maximum income limits are set based on the given area and the per capita income there. Certain areas will have a higher maximum income. The number of people in a household will also determine the maximum allowable amount. Unlike some other loan programs, USDA requires all working household members’ incomes to be considered for loan approval, even if they are not borrowers on the loan itself. This include other family members such as spouses and children over 18 who earn income.
One of the most appealing features of the USDA Rural Loan is that it requires absolutely no down payment. The only other mortgage loan program that requires no down payment is the VA loan and it is only available to veterans of the armed forces and surviving spouses. The Rural Loan is available to anyone who meets the easy approval standards who are buying homes in approved rural areas. They closest program to the zero-down loan is the 97 Conventional program which as stricter approval standards and requires 3% down, which isn’t always possible for buyers.
With the Rural Loan, a buyer can come to the closing table with no money out of their own pocket. They aren’t required to provide a down payment, and lenders allow sellers to cover up to 6% of the purchase price in closing costs. This is almost always more than enough to cover all costs and fees. To do this, the sellers increase the purchase price so that closing costs can be financed into the loan. Similarly, upfront mortgage insurance, called a guarantee fee for Rural Loans, is also financed into the loan. So owning a home with no upfront is a possibility with the USDA Rural Loan.
Buyers from all scenarios can take advantage of the USDA Rural Loan’s great benefits. First-time buyers especially are grateful for the lenient approval standards and affordability of the loan program. The USDA Rural Loan is offered through USDA-approved lenders only. A list of approved lenders is available on their website along with a history and map of eligible rural areas.