USDA Loans are low-Interest, zero-down-payment home loans that are guaranteed by the United
States Department of Agriculture (USDA). These loans are part of the USDA’s Rural
Development program, whose aim is to encourage homeownership in rural and suburban areas.
The loans are available to people with low to medium incomes who may not be able to afford the
traditional mortgage facilities.

Types of USDA Loans
The USDA offers three types of home loan programs. Each of these is discussed below:
1. Guaranteed Loan Program
In this program, USDA guarantees loans made by commercial lenders. The lenders must be approved by USDA. This guarantee reduces the risk of lenders, making it possible for them to
issue loans with low interests and without a down payment.

2. Direct Loans
These loans are issued directly by the USDA and not by the commercial lenders as it is the case
with the guaranteed loans. To qualify for this loan, the borrower’s base income limit should be
50%-80% of the area’s median income.

3. Home Improvement Loans
This is usually a combination of a loan and a grant issued to a borrower to enable them to repair
or upgrade their homes. The loans portion of the facility can be repaid for 20 years at a 1%
interest rate. It is eligible to borrowers who have base income that is less than 50% of the area’s
median income.

USDA Loan Eligibility

USDA home loans have very attractive terms however they are only available to certain
borrowers in particular areas. Other eligibility requirements include:

1. The borrower must be a U.S. citizenship or a legal permanent resident.
2. The loan must be used for a primary residence. This means that vacation homes and
investment properties do not qualify.
3. The property must be located in an area that is regarded as a rural area.
4. Borrowers must have a good credit history that demonstrates they can manage debt. They
must also have a good credit score of at least 640.
5. The borrower must have a dependable income.
6. The adjusted household income must be equal to or less than 115% of the area median
income.
7. The monthly debts payments of the borrowers must not exceed 41% of their income.
Sometimes the USDA can overlook this requirement if the borrower has a high credit
score.

Pros of USDA Loans

• Low-Interest Rates: Compared to the other conventional loans, the interest rates of
  USDA loans are way lower.
• No Down Payment Required: Borrowers can access 100% financing without having to
  worry about saving for the down payment. This is unlike most conventional loans which require a down payment of about 20%.
• No Monthly Mortgage Insurance: For conventional loans, If the borrower fails to meet
  the down payment requirements of the lender, they will be required to buy Private Mortgage Insurance (PMI). USDA loan does not require the borrower to pay PMI. Instead, borrowers pay an upfront guarantee fee which is usually 1% of the financed amount, and an annual fee which is 0.35% of the loan balance.
• Flexible Credit Guidelines: In most instances, to get a conventional loan facility, your credit score must be at least 660 and higher than that for you to get favorable interest rates. USDA loans do not have minimum credit score requirements however the borrower will need to have a credit score of 640 or above to be able to use an automated underwriting system. If the credit score is lower than this the borrower can still qualify for a USDA loan. In this case, manual underwriting will be used to determine the borrower’s creditworthiness.
• Favorable Loan Terms: USDA loans are available in 15-year and 30-year fixed-rate terms.

Cons of USDA Loans

• Geographical Restrictions
• No Vacation or income-generating properties