The United States Department of Agriculture agency provides an excellent way to purchase a home known as the Rural Housing Loan or USDA loan for short. For Minnesota residents in the right income bracket, this mortgage program is a way to buy a home without making a down payment.
Buying a home is an exciting milestone for many Americans. However, rising home prices and stringent mortgage requirements can make homeownership feel out of reach for some buyers This is especially true in more rural areas, where incomes tend to be lower but affordable housing is still scarce
If you’re a prospective homebuyer in Minnesota struggling to find a mortgage you can qualify for and afford, a USDA home loan may be the solution. USDA home loans are guaranteed by the U.S. Department of Agriculture (USDA) and aim to help low-to-moderate income buyers in rural areas achieve homeownership.
Keep reading to learn what USDA home loans are, who qualifies, and how the program works in Minnesota.
What Are USDA Home Loans?
USDA home loans, also known as USDA rural development loans, are a special type of government-backed mortgage created to promote homeownership in rural communities. They offer:
- 100% financing – No down payment is required
- Below-market interest rates – USDA home loans often have lower rates than conventional loans
- Low mortgage insurance – Upfront and monthly mortgage insurance costs are very low
- Flexible credit standards – Credit scores as low as 640 may qualify
- No income limits – Eligibility is based on the property’s location, not your income
USDA home loans are administered by the USDA’s Rural Housing Service They help rural residents who may not qualify for a traditional mortgage buy a modest home
USDA Home Loan Requirements
While USDA home loans are more flexible than conventional mortgages, you still must meet certain eligibility criteria. Here are the basic requirements:
Property Location
The home you wish to buy must be located in a USDA-designated rural area. The USDA defines rural as towns or census tracts with populations under 35,000. You can check your address on the USDA’s eligibility site to confirm it qualifies.
In Minnesota, eligible areas include many outlying towns and communities surrounding major metro areas like Minneapolis-St. Paul, Rochester, Duluth, and St. Cloud. Smaller cities like Bemidji, Brainerd, Alexandria, and Grand Rapids are also eligible.
Credit History
USDA mortgages are available to borrowers with credit scores as low as 640. While they may accept subprime credit, you still must demonstrate a willingness and ability to repay the loan. Major issues like foreclosure or bankruptcy in the last three years will likely disqualify you.
Income Limits
Unlike other government-backed loans, USDA mortgages have no income caps. Your eligibility is based on your credit, assets, and ability to repay – not your income. USDA loans help both low and moderate income borrowers attain homeownership.
Homebuying Education
First-time homebuyers are required to complete an approved homebuyer education course before closing on a USDA loan. This helps prepare buyers for the responsibilities of homeownership. Many nonprofit groups offer approved courses for around $50-100.
Occupancy and Use
USDA home loans require you occupy the property as your primary residence. Second homes or investment properties do not qualify. The home cannot be used for any income-producing activities either.
Citizenship
At least one borrower must be a U.S. citizen, U.S. noncitizen national, or qualified alien. Standard identification and documentation requirements apply.
How Do USDA Home Loans Work?
USDA home loans work much like other government-backed mortgages with a few unique features:
No Down Payment
100% financing means qualifying buyers pay nothing down. This removes one of the biggest barriers to homeownership. Closing costs can also be financed into the mortgage.
Fixed Interest Rates
USDA home loans offer fixed rates that are very competitive with conventional mortgages. As of August 2022, rates averaged around 5.25% APR.
Up to 33 Year Loan Terms
USDA mortgages feature longer repayment terms than conventional loans, up to a maximum of 33 years. This results in lower monthly payments.
Payment Assistance
Very low-income borrowers may receive subsidized payments that reduce the effective interest rate to as low as 1% for up to 3 years. This further improves affordability.
Lenient Credit Guidelines
Lower credit scores and higher debt-to-income ratios are often permitted. Manual underwriting provides more flexibility than automated underwriting systems.
Low Mortgage Insurance
Upfront and annual mortgage insurance costs are capped at very affordable rates. Currently, upfront MI is 1% of the loan amount and annual MI is just 0.35% of the outstanding principal balance.
No Prepayment Penalties
Borrowers can pay off their USDA home loan early with no prepayment penalties. This allows you to refinance or sell without penalty.
How to Apply for a USDA Home Loan in Minnesota
If a USDA mortgage sounds right for you, follow these steps:
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Check your eligibility. Make sure the home you want to buy is in a rural area. Review all the borrower requirements to ensure you qualify.
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Find a USDA-approved lender. USDA loans are only available through approved lenders that participate in the Rural Housing Guaranteed Loan Program. Local banks, credit unions, and mortgage companies may offer USDA loans if approved.
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Choose a real estate agent. Find an agent familiar with USDA loans who can help you identify qualifying homes and guide you through the buying process.
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Get pre-approved. Work with your lender to get pre-approved for an estimated loan amount. This will make your offer more attractive to sellers.
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Make an offer. Once pre-approved, you can confidently make an offer on a USDA-eligible home. Remember you can finance 100% of the purchase price plus closing costs.
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Complete homebuyer education. If you’re a first-time buyer, now is the time to sign up for a homebuyer course if you haven’t already. Ask your lender for help finding USDA-approved training.
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Close on your new home. After satisfying any financing contingencies, you can close on your USDA mortgage and get the keys to your new home! Don’t forget to apply for property tax benefits and utility assistance after closing.
The USDA does not lend money directly. You work with approved private lenders to obtain a USDA-guaranteed mortgage for purchasing, building, repairing, or rehabilitating a rural property. The local USDA Rural Development office can assist you with the process.
Benefits of USDA Home Loans
Why should Minnesota homebuyers consider USDA financing? Here are some of the top benefits.
Affordability
The two biggest hurdles to homeownership are coming up with a down payment and qualifying for a mortgage with good credit. USDA loans overcome both issues with:
- No down payment required
- Below-market interest rates
- Up to 33 year terms
- Payment assistance for very low-income borrowers
- More flexible underwriting
This allows more low-to-moderate income buyers to achieve homeownership.
Favorable Loan Terms
In addition to zero down payments and low rates, USDA loans offer:
- No prepayment penalties
- Loan limits that match conforming limits
- Ability to roll closing costs into loan amount
Borrowers aren’t penalized for paying off their mortgage early or selling the home. Loan limits up to $647,200 in Minnesota ensure you can buy a quality home on the USDA’s dime.
Access To Better Homes
Without coming up with thousands for a down payment, USDA borrowers can afford move-in ready homes right away. Newer homes with modern amenities often sell for list price or higher these days. USDA financing helps rural buyers compete for nicer homes without extra cash savings.
Build Equity And Wealth
Homeownership remains one of the best ways to build wealth over time. With no down payment, USDA borrowers start accumulating equity in their home right away through mortgage principal paydown. Equity and home price appreciation represent a valuable asset.
Stability
For many, owning a home provides financial and housing stability. USDA borrowers avoid pressures like rising rents and can live payment-free in retirement once their mortgage is paid off. Homeownership contributes to community stability as well.
Common Misconceptions About USDA Loans
While USDA mortgages offer great benefits, some hesitations about the program do exist. Here are a few common misconceptions debunked:
Myth: USDA loans are only for very low-income buyers.
FACT: There are no income limits to qualify for a USDA home loan! They help low, moderate, and middle income borrowers alike become homeowners. Your eligibility is based on your credit, assets, and repayment ability – not income.
Myth: The homes you can buy are run down or in bad areas.
FACT: USDA loans can be used to buy any modest
Basics of the USDA Mortgage
USDA Property Location Requirement
In the real estate industry, the USDA loan is commonly called a rural home loan. This comes from the single most important requirement for the mortgage; the prospective property must be in a rural area as designated by the Department of Agriculture.
Thanks to the internet, it is possible to look up these designated rural areas rather quickly. The USDA property eligibility map site allows consumers to look up a rural area by state, or, by property address. If assistance is needed for this, feel free to contact us anytime.
Generally speaking, most areas across the state fall in the designated rural locations.
USDA No Down Payment Requirement
The USDA guidelines will allow borrowers to receive a loan of up to 100% of the home’s appraised value. Compared to other loans that ask for a down payment ranging from 3% to 20% of the home’s asking price, this one factor alone can save borrowers a ton of money. It may also mean that borrowers can buy a home now since there is no need to take time to save up for the large down payment.
Type of Homes Eligible For USDA Loans
The USDA loan is not intended for the purchase of large farms or properties with a significant amount of acreage.
Instead, USDA will finance a single-family home. The home purchase may include up to 5 acres of adjoining land.
Townhomes, as well as condos, may be eligible, if they are in a rural area and approved or accepted by HUD/FHA, VA, Fannie Mae, or Freddie Mac.
USDA Occupancy Rules
A person applying for a USDA home loan must intend to live in the home as their main residence. The USDA program will not approve financing if the property is an investment home, a second home, or rental property.
USDA Income Guidelines
The USDA mortgage is designed for people with moderate to low income. For this reason, there are strict rules about the borrower’s income that must be applied.
The rule states that the borrower’s household income may not exceed 115% of their area’s median income. For example, if the median income is $60,000 for your area, you would be allowed to make up to $69,000 per year and still apply for the loan.
There are 2 things to keep in mind about the income limits. First, the income limit is based on the number of people living in the home. Therefore, a family of 5 will have a larger income limit compared to a married couple with no children.
Secondly, the income from all working people in the home is counted. For example, if the mom and dad both have full-time jobs, and their 17-year-old daughter has a part-time job, the daughter’s income will also be included in the calculations.
USDA Maximum Loan Size
The USDA rules do not have a specified maximum loan amount. Instead, the lender calculates the maximum amount the borrower can receive based on the size of their household, their total yearly income, and their debt. As long as the borrower meets the income guidelines for their area and meets the debt to income guidelines, they can be approved for the mortgage.
USDA Debt-to-Income Rules
USDA has 2 calculations involving the borrower’s debt and income. The first calculation is called the primary ratio and the second calculation is called the overall ratio.
Keep in mind that higher credit scoring borrowers may be able to exceed these ratios.
For the primary ratio, no more than 29% of the borrower’s monthly gross income can be used for the proposed mortgage payment, including property taxes and property insurance.
For the overall ratio, no more than 41% of the borrower’s monthly gross income may be used for both the mortgage payment and all other debt.
For example, using the previous example of a yearly income of $69,000 means the borrower has a monthly gross income of $5,750 ($69,000 divided by 12 months).
For this example, the home payment plus taxes & insurance cannot be higher than $1,667.50 and the mortgage payment plus all existing debt cannot be higher than $2,357.50.
If you need help with these calculations, your mortgage lender can review your income and credit report and show you the two ratio calculations.
Who Should NOT Get a USDA Rural Development Mortgage?
There are only 2 reasons why a person should not consider using the USDA mortgage for their next property purchase.
The first reason is the desire to live deep in the heart of the city. While it is true that nearly every county in the state has some areas designated as rural, the downtown location of most cities do not qualify for a USDA mortgage. People who dream of living in a condo that overlooks the city or a home at the apex of town should not consider using the USDA program for their home purchase.
The second reason is the high income. Many people across this great country have found a way to excel in their careers and earn an annual income that is much higher than the average person. This type of income is too much for the USDA program.
Pros and Cons of a USDA Loan | All You Need to Know About USDA Home Loans EXPLAINED
FAQ
What is the income limit for a USDA loan in Minnesota?
What is the difference between FHA and USDA home loans?
What are the pros and cons of a USDA loan?
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Pros
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Cons
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No down payment
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Income limits
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Competitive interest rates
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Property restrictions
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Relaxed credit requirements
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Occupancy requirements
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No PMI requirement
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USDA program fees
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What is the meaning of USDA home loan?