The United States Department of Agriculture (USDA) authorized the Section 502 rural home loan—also referred to as USDA home loan—to encourage families to migrate from metropolitan areas and build up rural communities.
USDA home loans are low-interest government mortgages with zero down payments designed for low-income earners with credit scores below the minimum needed for traditional loans. Here are some of the basics of the USDA home loan requirements that PA residents should be aware of:
- Typically, you can secure a USDA home loan with a credit score as low as 640.
- The loan must be used in designated rural and suburban areas.
- Depending on the loan, interest rates can dip below one percent.
- Monthly payments are typically 29 percent or less of your monthly income.
- Adjusted household income must be at or below the low-income limit set by Pennsylvania’s government.
If these factors apply to you, this article will help you navigate the process.
What are the types of USDA loans?
The USDA offers two different types of loans: a guaranteed USDA loan and a direct USDA loan. The following descriptions will help you develop a better understanding of which loan best suits you.
Guaranteed USDA Loan
A guaranteed USDA loan is created between USDA and local lenders. Guaranteed means that in the event of a borrower defaulting on a loan, the USDA insures a portion of the mortgage. For this reason, lenders tend to feel more comfortable offering modest loan terms to borrowers with low to moderate incomes and credit scores.
The adjusted household income of borrowers cannot exceed more than 115 percent of the median family income of the rural area in which the desired house is located. To find out the household income, factor in the incomes of the loan applicant and every adult in the household. These earners do not need to be on the loan application.
Direct USDA Loan
Unlike the guaranteed USDA loan, there is no lender involved in a direct USDA loan. Instead, the lender is the USDA. Typically, a direct USDA loan is available only to low-income earners who have no other opportunity for financing a house. To qualify, a borrower’s income must fall at or below the low-income limit of the region, defined by the USDA. In some regions of the country, this limit is at or below $17,000.
To find regions in Pennsylvania where you can finance a house with one of these loans, you can navigate through this map. This document also includes USDA’s definition of “low” income and guaranteed loan income limits based on region.
Rates, Terms, and Qualifications for Guaranteed USDA Loan
A guaranteed USDA loan is the most common loan for those eligible for a USDA loan. Here are the major factors you should be aware of:
- Fixed interest rates are less than those of conventional loans, which are typically between 3-5 percent of the home value.
- The payback period is between 15-30 years.
- An insurance premium of between 1-2 percent of the loan amount is applied in the case that the borrower defaults.
- Throughout the year, a fee of 0.35-0.40 percent of the loan is required.
- Closing costs include lender and administrative fees, and tend to be around 1-3 percent of the loan amount.
How to Apply for a Guaranteed USDA Loan
Contact a Loan Officer to help you through the guaranteed USDA loan application in the Pennsylvania region you want to live in. The following documents should be presented to the Loan Officer:
- U.S. citizenship or permanent resident identification
- Proof of non-citizen national or qualified alien status, if applicable
- Pay stubs and tax returns from the last two years
- Bills and financial obligations
- Credit score report
- Records of alternate credit such as rental and utility payments
After this step, your lender will process your mortgage application through the USDA.
Rates, Terms, and Qualifications for Direct USDA Loan
A direct USDA loan is specifically for borrowers with an income at or below the USDA’s qualification for low income in a particular region.
The fixed-interest rates are determined by the property’s market value at the time of mortgage approval or closing—whichever is lower. Here are some additional features:
- Depending on the borrower’s circumstances, rates can be as low as one percent.
- The typical payback period is up to 33 years, but it can extend to 38 years for lowest-income borrowers.
By examining the borrower’s employment, financial, and credit history, the USDA determines the maximum mortgage amount based on the borrower’s ability to repay the loan. Borrowers cannot borrow more than the loan limit for the region of Pennsylvania they plan to live in.
How to Apply for a Direct USDA Loan
The application process for a direct USDA loan differs from a guaranteed USDA loan. Rather than going through a lender, you will need to go directly to your local USDA Rural Development Office in Pennsylvania.
Partnering with radius financial group
There are a lot of hoops to jump through to acquire a USDA loan and purchase a home. Although it overall comes down to income and location, the process of obtaining a USDA loan can be made much easier by working with a Loan Officer at radius financial group.
A Loan Officer at radius financial group can inform you of the extensive documentation needed for the mortgage preapproval checklist. They can also help you establish how much house you can afford and which rates you can manage, and thereby determine the loan most suitable for you.
To learn more about the home-buying process in PA, visit our guide to buying in Pennsylvania.