USDA Loans are popular mortgage choices in rural areas like Southwest Missouri and Northwest Arkansas. They provide affordable home loan options with no down payment, as well as more flexible terms—perfect for low or middle income families and first time home buyers.
However, USDA Loan qualifications can be complicated, with income and property requirements that vary county-to-county, and that can sometimes be difficult to navigate. In this post we’ll provide basic information about USDA loans, from how to determine if you’re eligible to how to apply when you’re ready. Keep reading to learn more!
What is a Rural Development Loan?
Also called USDA Single Family Home Loans or USDA Rural Development Loans, these mortgage products are designed to help make homeownership affordable for low- and moderate-income families in rural and low-population suburban areas. These loans can be used to buy, build, refinance, or make renovations to a home. To make homeownership more accessible, USDA home loans tend to have less stringent qualification requirements than other home loans, and don’t require a down payment.
Types of USDA Rural Development Loans
There are both direct and guaranteed options available. The biggest differences between the two types of USDA home loans revolve around who funds them and who they are intended to serve. Direct loans are financed directly by the USDA and have strict income caps. Guaranteed loans are ‘guaranteed’ by the USDA (more on this below) but offered by select banks including CS Bank. Guaranteed loans have looser income restrictions and are intended for both low- and middle- income families and individuals. Similar to applying for a conventional mortgage, you will work with your bank to apply for a USDA guaranteed home loan.
Here are the key differences between the two loan products:
| USDA Direct Home Loan | USDA Guaranteed Home Loan |
|---|---|
| Apply directly through USDA at a local service center | Apply through your bank |
| Limited to buyers with low or very low incomes | Available to both low- and moderate- income buyers |
| Interest rate set by USDA | Interest rate set by bank (usually similar to current market rate) |
| 33- or 38-year term | 30-year term |
| Funded by USDA | Funded by bank, but backed by USDA |
| Property must be less than 2,000 square feet | No limit on property size |
How does a USDA Guaranteed Loan Work?
USDA are government loans offered by lenders at banks (like other home loans) but backed or ‘guaranteed’ by the government. Essentially, this means that the government assumes the risk for the loan instead of the lender, so lenders feel more confident lending to homebuyers who may not qualify for other home loans.
Perhaps the most important difference between USDA loans and conventional loans is the money buyers need to put down for their loan. Many homebuyers, particularly first-time and rural buyers, may struggle to come up with funds for a down payment. Down payments (typically 20%), are usually required to get a home loan, and requiring buyers to put money down is one way that banks mitigate lending risks. Because the USDA backs the rural development loans, homebuyers are able to get this home loan with no down payment (100% financing).
In addition to being a zero down payment mortgage, USDA home loans come with:
- A standard 30-year term
- Competitive interest rates (set by lender, but similar to those of conventional loans)
- No private mortgage insurance (PMI), even if you don’t put any money down
- Possible fees: Guarantee fee (currently 1% of loan), paid upfront or added to your monthly payment, as well as an annual fee (up to .5% of your remaining balance), added to your monthly payment
How to Get a Rural Development Loan
If you’re considering applying for a rural development loan, the first thing you’ll need to do is determine if both you and the property or properties you’re interested in qualify based on your income and the property’s location.
Income Requirements
To qualify for a direct loan, your income must fall between 50 and 80% of an area's median income. To qualify for a guaranteed loan, your income must be under 115% of your area’s median income. You can look up your income here on the USDA’s Eligibility Check Worksheet. Here are some of our current local county income limits for direct loans and guaranteed loans for individuals and families of up to four:
Barry County, MO: $50,300.00 (direct) / $103,500.00 (guaranteed)
Boone County, AR: $48,150.00 (direct) / $103,500.00 (guaranteed)
Carroll County, AR: $50,300.00 (direct) / $103,500.00 (guaranteed)
Madison County, AR: $66,950.00 (direct) / $103,500.00 (guaranteed)
Boone County, AR: $48,150.00 (direct) / $103,500.00 (guaranteed)
Carroll County, AR: $50,300.00 (direct) / $103,500.00 (guaranteed)
Madison County, AR: $66,950.00 (direct) / $103,500.00 (guaranteed)
Beyond meeting maximum income requirements, it’s also necessary, as with any loan, to provide proof that you have the ability to pay for your ongoing loan payments. You’ll need to provide proof of sufficient income for your desired loan amount and a decent credit history that shows that you pay your debts reliably. While there is more flexibility with credit scores for USDA loans than conventional mortgages, scores above 640 are generally preferred.
Lastly, for direct loans, you must present a specific need for the loan. This means both that you are unable to qualify for other home loan products, and that you are currently without adequate housing.
Property Requirements
Homes must be located in designated rural or low-population areas. Many areas of rural Missouri and Arkansas qualify, including areas in and around Cassville, Eureka Springs, Berryville, Harrison, Huntsville, and Holiday Island. You can look up specific property addresses on the USDA Eligibility Lookup Tool.
In addition to location, the houses themselves may be required to meet certain requirements based on their size and condition. As we mentioned above, for direct loans, homes can’t be larger than 2,000 square feet. Additionally, for any USDA home loan for an existing home, the home must be in good repair (determined by the USDA to be “decent, safe, and sanitary”) and be appraised for at least the value of the loan.
How to Apply for a USDA Mortgage Loan
Direct loans for low-income families are only available through the USDA. To learn more about how to apply as a resident of Arkansas, or how to apply as a resident of Missouri.
If you’re interested in a USDA Guaranteed Loan, you can apply through a local bank that offers USDA Loans. But before you even start looking for homes, you’ll want to get preapproved or prequalified for the loan, just like you would any other type of mortgage. This will give you a set budget to work within and provide evidence to potential sellers that you are a serious buyer and ready to make an offer.
CS Home Mortgage, a full-service mortgage division, offers USDA loans throughout Northwest Arkansas and Southwest Missouri.
What to Do When You Don’t Meet USDA Requirements?
USDA Rural Development Loans have strict requirements for both income and property location. If you don’t qualify for a USDA loan, but are still struggling to come up with the funds for a down payment, there are some other options for low-down-payment mortgages, including VA Loans and FHA Loans. For more information on these programs, check out our recent post, Do I have to Put Down 20% to Buy a Home in Northwest Arkansas?
You may also find that the specific area you are searching in doesn’t meet requirements for population limits. Because so many parts of our region do qualify, it may make sense to expand your property search to find one that does, working with your real estate agent and using the USDA’s Property Eligibility Lookup Tool.
Ultimately, talking to a mortgage expert can be your best bet for navigating these complex requirements, to ensure your home purchase is affordable and the process goes smoothly, from beginning to end. Reach out to an experienced CS Bank Mortgage lender with your home loan qualification questions.
Apply for a USDA Rural Development Loan with CS Bank
USDA mortgages can be complex home loan products with many different requirements and restrictions. Working with lenders who are experienced with government-guaranteed loan programs can help you compare your choices and avoid qualification pitfalls to make the application and approval process as quick and easy as possible.
Contact one of our knowledgeable Mortgage Lenders at CS Bank today to explore your mortgage loan options and learn more about Rural Development Loans.
For more information on Buying a Home in Northwest Arkansas and Southwest Missouri, check out these recent posts: