Mortgage interest rates are currently at record lows, and rates for USDA loans are among the lowest of the low. Because USDA loans are backed by the government, lenders are able to offer highly competitive interest rates to qualified applicants.
Read on to find out if you are eligible for a USDA loan and how you can apply.
What Are the Current USDA Interest Rates?
Interest rates change from day to day—and even from hour to hour in some cases—so it’s worth keeping an eye on them and locking in your loan when rates are low.
The pandemic prompted the Federal Reserve to slash the target rate earlier this year, and mortgage rates have generally followed suit, with USDA rates hovering around 3 percent, according to Mortgage Center. Conventional mortgage interest rates are typically higher than USDA rates by approximately 0.1-0.2 percent.
Who Qualifies for a USDA Loan?
USDA home loans are ideal for low- to medium-income applicants looking to purchase a single-family primary residence in a designated rural area. “Rural” generally refers to towns with populations of less than 35,000; approximately 97 percent of land in the United States is considered rural.
Despite USDA loans being backed by the U.S. Department of Agriculture, you don’t have to be a farmer to qualify for one of their loans.
The two most common types of USDA home loans are guaranteed and direct.
Guaranteed loans are backed by the government, but borrowers must work with a participating lender for financing. This loan is ideal for low- to medium-income borrowers, because there are income limits that factor in the income of all adults who will be living in the house. With a USDA guaranteed loan, borrowers have the option of putting zero money down with the purchase of mortgage insurance, which is great if you’re ready to purchase a home now, but you don’t have enough savings for a large down payment.
Requirements for a USDA guaranteed home loan include:
- Household income must be 115 percent or less of the median income in your area.
- The property must be located in a designated rural area; check USDA eligibility maps here.
- The home must be your primary residence.
- You generally should have a credit score of 640 or higher.
- Your debt-to-income ratio should be 41 percent or lower.
There are no set loan limits for USDA guaranteed loans, but you may be limited by how much you qualify for at the median income level. Mortgage insurance is required if you put less than 20 percent down (the initial premium and an annual fee are rolled into loan payments).
For direct loans, the USDA acts as the lender, which means you borrow directly from the government. USDA direct loans are meant for low-income applicants and offer interest rates as low as 1 percent.
How Do You Apply for a USDA Loan?
The application process for a USDA guaranteed loan is very different from the process for getting a USDA direct loan. If you’re interested in a direct loan, contact your local USDA rural development office and they will walk you through the process.
If you’re interested in a USDA guaranteed loan, find a participating lender and take the following general steps:
- Start the loan prequalification process with a participating lender (such as radius financial group) to see how much you can afford.
- Provide any necessary documentation (W-2s, credit check, bank statements, and so on) and get pre-approved for a mortgage.
- Find a USDA-approved home in a designated rural area and place an offer.
- Sign a purchase contract and request a USDA appraisal.
- Close on your new home.
The application process for a USDA home loan isn’t all that different from taking out a conventional mortgage loan, and if you work with a trusted loan officer, your path to homeownership should be relatively stress-free.
Take the Next Step Toward Homeownership
The future may be hazy at the moment, but one thing is clear: Mortgage rates are about as low as they’re going to get. It’s a great time to start the process of buying a home if you’re in a position to do so. For more advice from professional loan officers on how to best navigate the path to homeownership, check out our mortgage preparedness e-book.