USDA and VA Loans
Government-backed housing loans like USDA and VA loans are popular ways that may families buy their first homes. Their favorable interest rates and no down-payment requirement can help kickstart the homeownership journey for qualified applicants across the U.S.
USDA loans are for low-to-moderate income U.S. households located in rural areas. This program extends the opportunity for these families to own a home with certain benefits like a $0 down payment option, low interest rates, lower average monthly payment, and lenient credit requirements.
VA home loans assist veterans, current service members, and some surviving spouses to get more favorable home loans by guaranteeing a certain percentage of their mortgage, similar to USDA loans.
Both types of loans make affordable homeownership a reality: the USDA program promotes a healthy rural economy and overall improves the quality of life in these rural areas, while VA loans assist this country’s servicemen and their families by extending realistic homeownership avenues. In this article we’ll explore both options, including their benefits for homeowners.
USDA Loan Overview
USDA loans are zero-down-payment mortgages guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, which is a part of the U.S. Department of Agriculture. As mentioned above, these loans are designed for low- to moderate- income families living in rural or suburban areas.
These loans offer competitive interest rates and the opportunity to buy a home without a down payment, making them a favorable option compared to conventional loans. In May 2024, for example, the interest rate for USDA mortgages was set at 4.625%, whereas the average rate for conventional 30-year mortgages was 7.36%. USDA loans also don’t require borrowers to purchase private mortgage insurance (PMI), which is another barrier imposed by conventional loans.
Who is Eligible for USDA Loans?
USDA loans are available to the general public, as long as the following requirements are met:
- The property is in an eligible rural or suburban area.
- The borrower will occupy the property as a primary residence.
- The borrower is a U.S. Citizen, U.S. non-citizen national, or a Qualified Alien.
Beyond these requirements, eligibility is typically based on typical indicators like debt-to-income ratio and credit score, although no minimum credit score is formally required. When considering a home purchase, you can request a USDA loan estimate to assess the potential costs involved. Before applying, it’s important to check your state’s USDA website to ensure that you have the most current information regarding these borrowing requirements and eligibility parameters.
Types of USDA Loans
There are three different USDA home loan programs: loan guarantees, direct loans, and home improvement loans and grants.
1. Loan Guarantees
USDA participating lenders can offer low down payments because their mortgages are government backed and guaranteed. The VA and USDA guarantee some of your mortgage through a private lender, like a bank. Since a portion of your loan is guaranteed through the government, the lender can provide more favorable terms than they can towards traditional borrowers. Borrowers can also go without PMI for the same reason. Keep in mind that there is a 1% upfront fee as well as a 0.35% annual fee.
2. Direct Loans
Direct loans are offered to low- and very low-income applicants. The definition of “low-income” varies by region, so be sure to check the USDA website if you have any questions or would like to see the list of active USDA lenders. Generally, the applicant’s adjusted income must be below the low-income limit for their area, and they must have a demonstrated ability and willingness to eventually repay their loan.
Direct loans offer payment assistance to increase the applicant’s ability to repay their loan. The USDA completes this by offering a subsidy that reduces the mortgage payment for a set amount of time. Interest rates can be as low as 1% but vary by lender.
3. Home Improvement Loans and Grants
USDA home improvement loans and grants (also known as the Section 504 Home Repair program) allow homeowners to upgrade or repair their homes with up to $50,000 in assistance through a combined loan and grant.
The maximum home improvement loan amount is $40,000. These are repaid over a 20-year period at a fixed 1% interest rate. Grants, on the other hand, are capped at $10,000, and must be repaid if the property is sold in less than three years.
To apply for this improvement program, you must both own and occupy the home. Applicants must have a household income that does not exceed the limit defining “very-low” income for their area, and they are unable to obtain affordable credit from a non-participating lender.
Loans can be used to repair your home, modernize it, or remove health and safety hazards that could be detrimental to the household’s ability to live and work within the home. Grants can only be used to remove health or safety hazards.
Benefits of USDA Loans
With a USDA rural development loan, you can secure financing without the burden of a minimum down payment. The interest rates offered are often more favorable compared to conventional loans, making homeownership more accessible.
USDA loans also provide credit flexibility for those with lower credit scores, opening doors to individuals who may have been previously excluded. These loans are specifically designed for buyers interested in rural homes and backed by the U.S. government to support relaxed credit score requirements.
VA Loan Overview
The second type of government-backed loan is VA loans. VA loans are mortgages guaranteed by the U.S. Department of Veterans Affairs (VA) that are issued by provide banks and lenders.
The VA provides various benefits to military veterans. Some of their benefits include health care and cemetery services, but they also extend the opportunity for more advantageous homeownership to help veterans, current service members, and surviving military spouses. This is the purpose of the VA loan program.
VA backed home loans are similar to USDA loans in many respects: They have a zero down payment requirement, limited closing costs, competitive interest rates (typically lower than USDA loans), and don’t require PMI. However, VA loans differ from USDA loans in that they are only available to the veteran community. Veterans can use the VA home loan benefit multiple times since it is a lifetime guaranteed benefit.
Who is Eligible for VA Loans?
VA loans are available to:
- Active service members (who have served at least 90 consecutive days)
- Veterans who have served a VA-determined length of time, depending on when you served and whether you were an officer
- Reserve members, depending on when you served
Additional VA loan eligibility requirements include:
- The borrower must occupy the property as a primary residence
- The borrower must move in within 60 days of closing
- The property must adhere to the VA’s Minimum Property Requirements (MPRs)
Individual home loan benefits vary depending on the applicant’s length of service, service commitment, duty status, and character of service. National guard members are also included in VA loan eligibility if they have served for at least 90 days.
Note that there is no income limit for VA loans as there is with USDA loans. There is, however, a VA funding fee similar to the upfront fee for USDA loans.
Types of VA Loans
There are several types of VA loans: purchase Loans, cash-out refinancing, Interest Rate Reduction Refinance Loans (IRRRL), Native American Direct Loans (NADL), and Adapted Housing Grants.
Purchase Loans
VA purchase loans allow eligible service members to purchase a home with zero down payment. Lenders offer competitive interest rates on these loans.
According to the VA, purchase loans can be used for any of the following purposes:
- To buy a single-family home up to 4 units
- To buy a condo in a VA-approved project
- To buy and make improvements to a home
- To buy a manufactured home or lot
- To fund construction of a new home
- To fund changes or add new features to increase energy efficiency
To qualify for a VA purchase loan, you must meet the lender’s general criteria and have a VA-backed home loan Certificate of Eligibility (COE).
Cash-Out Refinances
VA cash-out refinances allow eligible borrowers to replace their current conventional loans with a VA loan, tapping into their home equity in the process. VA cash-out refinance loans are often used to pay off high-interest debt or pay for large expenses like college tuition or home renovations. To qualify, you must still meet lender requirements and have a COE.
Interest Rate Reduction Refinance Loans (IRRRL)
IRRRLs can only be taken out if you already have an existing VA guaranteed loan on your property. This loan is used to lower your current interest rate and reduce your monthly installment to make your repayment plan more manageable.
Native American Direct Loan (NADL) Program
Native American veterans can benefit from NADL loans by applying and using the funds towards purchasing, constructing, improving, or refinancing their home on Native American trust lands. To be eligible, your tribal organization must participate in the VA direct loan program, and you must have a valid COE.
Adapted Housing Grants
If you suffer from a total or permanent disability related to military service, the VA will help you find suitable and accessible housing via Adapted Housing Grants. They can extend either a Specially Adapted Housing (SAH) or Special Housing Adaptation (SHA) grant to help you find or adapt your home to fit your needs.
Conclusion
Whether you’re someone looking to find safe and suitable housing in a rural area or a veteran trying to find the same, government backed loans can help you make your dreams a reality.
Both loan programs offer unique benefits and eligibility criteria tailored to your specific needs. If you have questions related to the information above, reach out to either the USDA or VA via their website “Contact” section. Their representatives are trained to know and apply the USDA and VA loan guidelines and requirements.
