USDA Loans

Why USDA Home Loans Are a Great Option for First-Time Buyers

Jul 2, 2018, 4:21 PM | Robin Kocherhans
An African-American couple hold a

Are you preparing to buy your first-ever home? If you’re like the majority of first-time homebuyers, coming up with enough money for a down payment is often the most challenging aspect of the buying process.

For a conventional mortgage, you could be required to put down anywhere from 10 – 20% of the home’s total sale price. Based on the current median price of $274,500, that means you’d have to pay anywhere from $27,450 to $54,900 just for a down payment.

Many hopeful homeowners just don't have that kind of money saved, and it can deter them from buying the home of their dreams.

Fortunately, a conventional mortgage loan isn’t the only option if you can't afford that kind of down payment. With a USDA home loan from the U.S. Department of Agriculture, you don't have to make a down payment, so buying a home is more attainable and affordable.

What Is a USDA Home Loan?

Also known as a rural development guaranteed housing loan, a USDA home loan is a type of mortgage loan from the United States Department of Agriculture that’s available to both first-time and repeat homebuyers wanting to purchase a home in a rural or semi-rural area.

As one of the most popular first-time homebuyer loans, a USDA loan is one of just two 100% financing home loans available in today’s realty market.

With the goal of helping residents in rural and suburban areas buy property, USDA loans not only eliminate the requirement of a down payment, but they also have low mortgage and insurance rates. These decreased costs can help you both achieve and sustain homeownership.

How a USDA Loan Works

Having a comprehensive understanding of how a USDA home loan works is helpful, especially for a first-time homebuyer loan.

First and foremost, you have to find a property in an area that qualifies for a USDA loans.

USDA loans can only be used for homes in rural or suburban areas, as defined by the Department of Agriculture. Luckily, most areas in the U.S. qualify; according to The Mortgage Reports, as much as 97% of the land mass in the United States qualifies.

So, even if you think you live too close to a metropolitan or urban area, you might be surprised to learn that the home you’re interested in buying could actually be eligible for a USDA home loan. It’s certainly worth checking.

Secondly, you need to determine which USDA loan you want. Technically there are two different types of USDA home loans that first-time homebuyers can use:

  1. Guaranteed housing loans
  2. Direct housing loans

Which one you choose depends on your financial situation. With direct USDA loans, the USDA serves as the actual lender, so they have stricter income limitations and property qualifications. Only families who are considered very low or low income (50 – 80% of the median income for an area) can qualify.

Guaranteed USDA loans, on the other hand, still have property and income requirements, but they are less stringent because the USDA is simply backing a portion of the loan instead of funding it in full. Most borrowers getting a USDA loan will likely go this route.

Finally, the third step is to find a lender and apply. With a direct loan, the lender is the USDA. For guaranteed loans, since they're done through a private lender, you'll want to shop around to find and compare terms and rates from a few different ones.

What Are the Eligibility Requirements for USDA Home Loans?

Since most borrowers will qualify for a guaranteed loan instead of a direct loan, we're going to focus on those qualifications in this section.

The primary requirement for a guaranteed USDA loan is that you can't make more than 115% of your area's average income. In addition, you also need a credit score that is 640 or better in order to automatically qualify.

As for the home you want to purchase, in addition to being in an eligible area, it must also meet several structural and functional standards including:

  • Easy accessibility from a well-maintained roadway
  • Structurally sound foundation and framework
  • A moisture-proof roof that meets certain lifespan requirements
  • Functional heating and cooling systems, if applicable
  • An up-to-date, safe, and operational electric system
  • Acceptable plumbing for proper waste removal
  • Adequate water flow for operational standards

These qualifications make the possibility of qualifying for a home remarkably attainable, especially when compared to the extensive qualifications for conventional mortgage loans.

Not only do the practicality of requirements make a USDA home loan a great option for first-time homebuyers, but the zero-down payment and low monthly rates also help ensure that your first home owning experience will be nothing short of a success.

Robin Kocherhans

Robin has been writing about mortgages for almost 2 years and has been a professional writer for 8. She loves researching and answering your questions about home loans and the mortgage process, as well as helping simplifying complex topics to make them easier for you to understand.