You have numerous options when it comes to getting a mortgage. If you don’t qualify for a conventional mortgage, a government-backed program might be right for you. The federal government insures government-backed loans, which often open the door to homeownership to people who would otherwise not be able to get mortgage home loans.
One of the best-known government-backed loan programs is the FHA loan. But it’s not the only program out there. The United States Department of Agriculture (USDA) backs several loan programs, two of which help people living in rural areas purchase a home.
What Is the USDA No-Money-Down Rural Loan Program?
The USDA Rural Loan Program is a combination of three separate programs. Two of the programs help people buy a home, while the third program helps people make repairs or improvements to a home they already own.
The three USDA rural development loan programs include:
- Single-family housing guaranteed loan program — The guaranteed loan program provides mortgages to homebuyers looking to purchase in a designated rural area. The USDA guarantees the loans, but they don’t come from the USDA itself. Instead, the loans come from USDA-approved lenders or banks.
- Single-family housing direct home loans — Loans under the direct home loan program come straight from the USDA, not a private lender or bank. Development income eligibility limits for USDA direct home loans are stricter than they are for the guaranteed loan program, as the direct loan program is for low or very low-income households.
- Single-family housing repair loans and grants — Like the USDA direct loan program, repair loans and grants are available to low or very low-income households. The critical difference is that the person receiving the loan needs to own their home already.
How Does the USDA Home Loan Program Work?
The USDA rural housing home loan program shares some things in common with other government loan programs like the Federal Housing Administration (FHA) and Veterans Affairs (VA) loan programs. The programs are open to people who are purchasing a home to live in and who would otherwise have trouble qualifying for a mortgage.
One way the USDA loan programs open the door to homeownership is by giving buyers the option of getting a mortgage without a down payment. The guaranteed loan program provides lenders with a 90 percent loan note guarantee, which significantly reduces their risk when making a loan that’s worth 100 percent of the property’s value. The loan note guarantee means if the homeowner fails to make payments on the property, the USDA will step in to cover the balance, up to 90 percent of the home’s value.
If you receive a USDA-guaranteed loan and don’t make a down payment on the property you’re buying or make a minimal down payment, you’ll need to pay a two-part guarantee fee: You pay a fee upfront, at the time of closing, and another one annually. The fees are comparable to the mortgage insurance premiums FHA loans or private mortgage insurance payments on conventional loans require, but USDA guarantee fees tend to be much lower than FHA or conventional mortgage insurance premiums.
The USDA direct loan program offers even more benefits to qualified homebuyers. Like the guaranteed loan program, it doesn’t require a down payment in many cases. Since the direct loan program has more stringent income requirements, homebuyers who have assets above a certain amount might have to use those assets to make a down payment.
Another feature of the direct loan program is payment assistance. The loans offer a fixed interest rate based on market rates. But payment assistance can help reduce the interest rate a homeowner pays to 1 percent. The loan term for a direct loan from the USDA can be 33 years or up to 38 years for very low-income applicants.
How to Qualify for a USDA Loan
USDA home loans can be an ideal way to afford to buy a home. But they aren’t right for everyone. To qualify for a USDA loan, whether it’s a guaranteed home loan or a direct loan, you need to meet specific criteria. Your income needs to be within a certain range, the home needs to be within a particular location and you need to meet several other requirements.
To qualify for a USDA guaranteed home loan, you need to:
- Not earn more than the maximum income limit in your area — usually no more than 115 percent of the median income in your area
- Be a U.S. citizen, non-citizen national or qualified alien
- Live in the home you buy as your primary residence
- Be able to afford the monthly payments — they should be no more than 29 percent of your monthly income, although a higher amount might apply if you have a higher credit score
- Have a credit score of at least 620
- Purchase a USDA-eligible property in an eligible area — the program doesn’t allow working farms
- Be allowed to participate in federal programs
- Be able to meet any other credit obligations you have after taking on the loan
To qualify for a USDA direct home loan, you need to:
- Earn an income that is less than 80 percent of the median income in your area
- Meet citizenship or non-citizen requirements
- Live in the home as your primary residence
- Be allowed to participate in federal programs
- Be currently without safe or sanitary housing
- Be unable to get a mortgage or financing through other resources
Under the direct loan program, the house you buy needs to meet several requirements as well. They include:
- Size — The house needs to be “modest” in size, usually less than 2,000 square feet.
- Amenities — The house can’t have an in-ground swimming pool.
- Value — The house’s value needs to be less than the limit for the area.
- Use — You won’t be able to use the house for income-producing activities.
Location is a significant requirement when applying for either a guaranteed home loan or a direct home loan. To qualify for either mortgage, the home you buy needs to be in an eligible rural housing area. Homes in metropolitan and urban areas are typically ineligible for the USDA home loan program. If you are considering buying a home in York, Pa., or another area of the state, see if the area you are looking to buy in is eligible for a USDA home loan.
USDA Loan Program Eligible Areas in York County, Pa.
There’s good news for homebuyers looking to purchase in York County, Pa. Much of the county is eligible for the USDA’s loan programs, including several cities in the county. Eligible towns in York County include:
- Fawn Grove
- Glen Rock
- Mount Wolf
- New Freedom
- York Haven
If you are looking to purchase a home in the following areas in York County, your house would not be eligible for a USDA loan:
To qualify for a USDA guaranteed home loan in York County, your household income needs to be less than $85,450 per year if you have up to four people in the house. If there are more than five people in the house, the income limit is $112,800.
If you are interested in a direct loan from the USDA and you have up to four people in the household, the income limit is $59,450 per year. For households with more than five people, the income limit is $78,450 for a direct loan.
USDA Loan Program Eligible Areas in Cumberland County, Pa.
Much of Cumberland County, Pa., is eligible for the USDA home loan programs. Areas of the county that are ineligible for the program include the areas around Carlisle, Mechanicsburg and Enola.
If you are looking to purchase a home in the following towns in Cumberland County, your house would be eligible for a USDA loan program:
- Boiling Springs
- Mount Holly Spring
If you’re looking to purchase a home in the following cities in Cumberland County, your house would not be eligible for the USDA’s loan programs:
The income limits in Cumberland County are slightly higher than the limits in York County. You can qualify for a USDA guaranteed loan with an annual income of up to $86,450 for a household of up to four or with an income of up to $114,100 for a household with more than five people.
For the direct loan program, your household income can be up to $60,150 per year if up to four people live in the home or up to $79,400 if more than five people live in the house.
USDA Loan Program Eligible Areas in Adams County, Pa.
Nestled to the west of York Country, Adams County was once part of York. Today, the county is a mostly rural area, and much of it is eligible for the USDA’s home loan programs.
If you’re considering buying a home in the following towns and cities in Adams County, your purchase would be eligible for a loan program from the USDA:
- Carroll Valley
- New Oxford
- York Springs
Only one part of Adams County is ineligible for the USDA’s programs. That area is Midway, a census-designated place with a population of just over 2,000 people.
To qualify for a USDA guaranteed home loan in Adams County, your household income needs to be under $86,100 if you have up to four people living in the home. The income limit for households with more than five people is $113,650. To qualify for a direct loan in Adams County, your household income needs to be less than $59,900 for up to four people or $79,050 for more than five people.
USDA Loan Program Eligible Areas in Dauphin County, Pa.
Located to the northeast of York County, some parts of Dauphin County are eligible for the USDA’s loan programs. Because the county is home to Harrisburg, the state capital and the 10th largest city in the state, a significant portion of it isn’t eligible for the USDA’s programs.
If you were going to buy a house in the following areas of Dauphin County, your purchase would be eligible for a USDA loan:
- Skyline View
Homes in the following cities and towns in Dauphin County don’t qualify for the USDA’s loan programs:
Income-wise, you can live in a household with up to four people and have a household income of up to $86,450 annually to qualify for a USDA guaranteed home loan program in Dauphin County. If your household has more than five people, the maximum income climbs to $114,100 per year. To qualify for a direct home loan program from the USDA, your household income needs to be less than $60,150 for up to four residents or $79,400 for more than five residents.
USDA Loan Program Eligible Areas in Lancaster County, Pa.
Located in Southern Pennsylvania, Lancaster County is a predominantly rural area. So it’s little surprise that a large part of the county qualifies for the USDA’s loan programs.
If you are considering buying a home in the following areas of Lancaster, your house would be eligible for a USDA loan program:
- New Holland
- Strasburg Gap
- Terre Hill
There are a few areas of Lancaster that aren’t eligible for a USDA loan. Those areas include:
- East Petersburg
Lancaster County has slightly lower maximum income limits for both the USDA guaranteed and USDA direct loan programs. To qualify for a guaranteed loan, your annual income has to be under $84,900 for up to four people or $112,050 for more than five people. Direct loan income requirements are a maximum of $59,050 for the year for up to four people or $77,950 for more than five residents.
USDA Loans vs. FHA Loans
Although both FHA loans and USDA loans help people purchase a home and qualify for a mortgage, the two programs aren’t identical. They share a few things in common, such as being government-backed and requiring the homeowner to live in the house.
However, there are also some significant differences.
- Down payment: FHA loans require a down payment of at least 3.5 percent. USDA loans are available with no down payment.
- Income limits: FHA loans don’t have an income limit, but USDA loans do.
- Credit score: USDA loans typically require a higher credit score — at least 620 — than FHA loans. You can qualify for an FHA loan with a score as low as 500.
- Interest rates: FHA loans often have higher interest rates than USDA or conventional loans. Since some USDA loans offer payment assistance, your interest rate can be as low as 1 percent.
- Location requirements: You can use an FHA loan to buy a house anywhere in the U.S.
- Debt-to-income ratio: You need to have at least a 29 percent debt-to-income ratio for a USDA loan. FHA loans are available to borrowers with slightly higher amounts of debt.
- Mortgage insurance: FHA loans charge an upfront mortgage insurance premium and a monthly premium. USDA loans technically don’t have mortgage insurance, but loans in the guaranteed program charge a guarantee fee.
If you are looking to buy a home in a rural part of Pennsylvania, a USDA home loan program can help you get your foot in the door and might make getting a mortgage more accessible and affordable. CENTURY 21 Core Partners can help you find your dream home in York County or elsewhere in Pennsylvania. We can also help you find an approved lender for a USDA loan. To learn more, contact us today.