Sometimes qualifying for a traditional loan can be cumbersome with restrictions on credit and income. USDA loans are ideal for first-time Colorado homebuyers or anyone who has saved less than 20% for a down payment. USDA loans come with fixed interest rates and no money down.
Those with less than perfect credit scores will be relieved to know that the USDA has flexible credit guidelines. No assets are needed to qualify so you won’t have to worry about putting property up as collateral.
The USDA offers loans to people making low to moderate incomes, living in areas with smaller populations. These loans are backed by the U.S. government, so lenders are more open to lower credit scores and lower incomes. The lender knows that their money is safe because the government has guaranteed the loan. The best thing about USDA loans is the no money down feature.
Why does the government offer USDA loans?
The purpose behind USDA loans is to encourage the development of less populated areas. In order to qualify for a USDA loan, you’ll need to look for properties outside the city limits or within areas with a population less than 20,000 people.
Three Types of USDA Loans
Section 502 Direct Loans
Low- to moderate-income homebuyers can use these direct loans to build or repair homes in eligible rural areas. These loans have long repayment periods (up to 38 years) and extremely low interest rates of one percent. Payment assistance is available.
USDA Guaranteed Loans
Government-approved lenders offer no money down loans to buyers with less than perfect credit scores. The government guarantees 90 percent of these loans, so lenders are more open to lower credit scores and lower incomes than conventional loans. However, there are income limits, so you’ll want to check with your real estate agent or lender for details.
Section 504 Loans (Home Repair Loans)
You can be approved for up to $20,000 for home repair and renovation costs. Grants are also available for up to $7,500. These loans can be used to remove health hazards such as mold and radon.
Advantages of USDA Loans
You may wonder how USDA loans differ from conventional mortgages. The good news is that USDA loans come with far more advantages and incentives than a conventional loan.
- USDA loans are no money down. The minimum down payment for most conventional home loans tends to be 5%.
- USDA loans have low fixed interest rates.
- No assets required for collateral with USDA loans.
- USDA loans have flexible credit score guidelines.
- Lower income buyers qualify for USDA loans. However, there are some income limits for USDA loans, but they are far more lenient than conventional loans. Check with your real estate agent or lender for details.
- Property limitations exist for USDA loans. You must meet these requirements in order to be approved. USDA loans were intended for homebuyers of rural and suburban single-family homes.
- USDA loan fees are non-negotiable. For USDA-guaranteed loans, expect to pay a 1% upfront fee along with a 0.35% monthly mortgage insurance fee. This monthly fee will be for the life of the loan. If you’re getting a 502 direct loan, you’ll be required to complete a homeowner education course. These courses are not free. Check with your lender or real estate agent for details.
Things to Consider...
The USDA doesn’t set specific loan limit maximums for guaranteed mortgages. However, local limits are determined by combining the buyer’s debt-to-income ratio and the area’s USDA maximum income limit. This practice is done for the USDA guaranteed loans only.
The USDA direct loans do have set maximum loan limits. For the USDA direct loans, check this USDA loan limit map for the limits in your area.
How do I know if this home is eligible?
You can check if a property is eligible for a USDA loan, by entering the address at the USDA Loan Property Eligibility website.
How to Apply
Now that you know how great a USDA loan is, you may be asking “How do I get a USDA loan?” The first step in applying for a USDA loan is to determine if you qualify. Here are the qualifications:
- Check your area for income eligibility for 502 direct loans, 504 loans, or USDA-guaranteed loans. On this page, you can also check property eligibility. This determines if the property you wish to buy is eligible for USDA loans.
- Primary residence: You must plan to occupy the home you wish to buy with a USDA loan.
- You must be a U.S. citizen or eligible as a non-citizen under the USDA eligibility requirements. It’s a good idea to contact an experienced realtor or lender if you are unsure.
- You must have acceptable credit, but it doesn’t have to be a perfect score.
The application process depends on which of the three types of USDA loans you choose.
- If you choose the guaranteed loan, then ask your realtor for help or find a USDA-approved lender from this USDA lender list.
- If you choose a USDA 502 direct loan, then contact the USDA office in Colorado or call (720) 544-2903.
- If you choose a USDA 504 loan for home repairs, then contact a realtor or lender in your area. You can also contact the USDA Colorado office at (720) 544-2903.
Whichever loan you choose, always compare offers from lenders because they may charge different fees. An experienced realtor can help you select a qualified USDA-approved lender and offer advice about the home loan application process.