If you've got an appetite for rural real estate, it's worthwhile to learn about USDA loan requirements. The U.S. Department of Agriculture provides direct mortgages and guarantees loans by third-party lenders that require no down payments for residential projects. Direct and guaranteed loans with down payments are available for farming projects and agricultural businesses that provide detailed records or business plans.
General USDA Loan Requirements
The requirement common to all USDA loans is a rural location. The agency has different definitions of rural areas, depending on whether a loan would fund a residence or an agricultural business. In the case of a home loan, a rural area is considered to be open country or an area with a population of 10,000 and under. Farming-related businesses are considered a rural area if they're in open country or a municipality with a population of 50,000 and under. The USDA's website includes an interactive map showing which locations meet the rural definition for residential and business purposes.
Credit Scores
The USDA and its lending partners typically look for a minimum credit score of 620, which is considered average. However, the USDA focuses less on these scores than other lenders do. Borrowers with poor credit can demonstrate that they have recovered from past circumstances that have a lingering negative effect on credit scores.
Income Limit
USDA direct loans are available to households whose incomes are as low as half of the median income in the household's region. For guaranteed USDA loans, which are granted through third-party lenders, borrowers' income must not exceed 115% of the median income for the location where the applicant's desired property lies. USDA lists region-specific income limits on its website.
Cost Ratios
For both direct and guaranteed loans, prospective borrowers' housing costs must equal no more than 29 percent of household income before the loan. The housing and loan payments, including interest, should account for no more than 41 percent of the borrower's income. These percentages help determine the maximum loan amount a borrower can apply for. Direct USDA loans tend to have lower maximum amounts than USDA guaranteed loans.
About Bankruptcies
Prospective borrowers may not be in the throes of bankruptcy. You are eligible to apply for a USDA mortgage if you've been discharged from a Chapter 7 bankruptcy for at least three years, or if you've been in a Chapter 13 bankruptcy for at least a year and have complied with all of the court's requirements for at least one year.
Loan Terms
Both residential and business loans usually have fixed interest rates and maturities of 20 to 30 years. USDA loans have no penalties for prepayment of outstanding balances and allow for the closing costs to be included in the loan amount, depending on the outcome of the property appraisal. USDA government assistance mortgages for residences require the owner to occupy the property, which can include condominiums, manufactured homes, multifamily developments and single-family homes.
Specific Programs
Special programs underneath the USDA lending umbrella have additional requirements beyond the aforementioned ones. The USDA's Farm Service Administration provides direct and guaranteed loans to family ranchers and farmers, who cannot otherwise obtain commercial loans from bank, for the purposes of farm ownership and operations.
Ownership Versus Operations
Like its name suggests, FSA farm ownership loans pay for acquisitions of farms or ranches, land for farming and ranching, and new building construction on the property. FSA operating loans cover operational expenses, including purchases of livestock, equipment, seeds, feed, insurance, building improvements, land and water development costs, some debt refinancing and family subsistence.
New Farmers
FSA has a category of loan for those who haven't operated a farm or ranch for over 10 years, and calls these borrowers beginning farmers and ranchers. The borrower cannot own a farm or ranch that is over 30 percent of the median size farm or ranch within the borrower's county. If the borrower is more than one person, they should be related to one another by blood or marriage and all have beginner status.
Socially Disadvantaged Farmers
FSA has a direct loan specifically for assisting minorities and women who want to purchase a farm or ranch. This program can also be used for retiring farmers who want to transfer land to their progeny. The loan requires at least a five percent down payment, and the maximum amount loaned cannot exceed $225,000. Additional funds for the property can come from another lender, as long as the maturity doesn't exceed 30 years. If the secondary loan comes from a commercial lender, the USDA may guarantee up to 95 percent of the value.
Student Farms
FSA encourages young people aged 10 to 20 to learn farming, with operating loans of up to $5,000. Qualified projects must have an educational focus, and the borrowers need to be part of a supervised group like a 4-H club, school-sponsored group or similar organization. The group needs to produce enough income to repay the loan while teaching the young people about agriculture.
Emergency Loans
To qualify for an emergency loan, the borrower's property must lie in a county that's within a federally-designated disaster area or part of a region USDA has quarantined. The borrower must apply within eight months of the region being declared a disaster or quarantined area. The Secretary of Agriculture or the President of the U.S. must have made the declaration of quarantine or disaster area status. The FSA Administrator also has the authority to approve emergency loans to farmers or ranchers who've had at least a 30 percent loss in crop production, or a similar downturn in revenues from livestock. All emergency loans require full collateralization and are considered a temporary form of financing, with repayment expected in one to seven years.
Learn More
The USDA offers a variety of loan programs. To learn more about these programs and find USDA lending offices near you, visit the USDA website, which is linked to in the second paragraph of this article. The USDA site contains a directory of county offices taking applications for direct USDA loans, and also lists third-party lenders for USDA-guaranteed loans, which are more prevalent than direct loans. Additional information about USDA loan requirements appears on GovLoans.gov, USDAloans.com and USDAloans-101.com.
