The U.S. Department of Agriculture offers two ways to get a mortgage: a loan guarantee program for financing from a bank or credit union, and a direct loan program where you borrow straight from the USDA. The latter has much stricter requirements, but both programs have restrictions on location, income and type of home eligible for the loans. If you're looking to finance your uptown penthouse, the USDA is not an option. Only rural properties used as primary residences are eligible.
USDA terms are incredibly generous, if you meet all the requirements. The guarantee program offers 30-year loans at a rate set by the lender. You must have sufficient credit to obtain a loan, but no down payment is required. Any Veterans Administration, Housing and Urban Development or Rural Development-approved lender can participate. The direct loan program offers terms of 33 years, or 38 years for applicants with extremely low incomes, and the interest rate is set by the Housing and Community Facilities Program.
The kicker here is that USDA loans in either program are only available in rural areas. Though there is no set definition, there is a useful map tool available on the USDA website indicating which regions are eligible. You can even plug in an exact address. Other rules state that the home must be modest and not exceed a local area loan limit, details of which are available from the USDA Service Center in your locality.
For a direct loan, your income must be below 80 percent of the area median income. You must not be able to obtain financing from another source, but be able to cover mortgage, insurance and tax payments which the USDA estimates to be approximately 24 percent of income. Generally, applicants with steady but low-paying jobs and poor credit are most likely to be approved. The loan guarantee program is available to those with incomes up to 115 percent of the area median income and has stricter debt-to-income requirements and minimum credit ratings.
For the direct financing program, fill out form RD 410-4, which requires details about the property you wish to purchase as well as financial and employment information from up to two joint applicants. You'll also need Release Form RD 3550-1, allowing the Rural Housing Service to obtain additional financial information needed to process your application. Submit the completed paperwork to the local USDA Service Center office. Application for the loan guarantee program must be made through your local USDA office.
Aside from the small pool of eligible properties and applicants, USDA direct loans are not governed by the same rules and regulations as bank loans. If you fall behind in your payments, the USDA may garnish government benefit payments without a court's permission, even if you are not in foreclosure. That means your federal tax refund or even Social Security check might be used to pay all or part of your delinquent mortgage. Loans made through the guarantee program via a bank are subject to regular federal regulations regarding foreclosures.
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