History and Background of the USDA Home Loan

Borrowers will run into several mortgage loan options during their homebuying journey. A unique program that’s the perfect choice for some buyers is the USDA home loan. Let’s look at the history of this loan program, how it works, and what makes a property eligible for it.

What Is a USDA Home Loan?

A government-backed loan, the U.S. Department of Agriculture (USDA) loan is available on properties located in rural parts of the United States.

The USDA uses the following criteria for deciding if an area is going to be covered:

  • Communities of 2,500 or fewer people, not linked to a major city
  • Communities rural “in character” with under 10,000 residents
  • Communities with under 20,000 residents, unrelated to a metropolitan area

History of the USDA Loan

USDA home loans, also called rural development loans, began in 1949 as part of the Housing Financing Act. The goals behind the program were to create new jobs, build up rural communities, and generate more local tax revenue. By focusing on homeownership in more rural areas of the country, the program helps low and middle-income buyers afford to purchase a house.

How a USDA Loan Works

A USDA eligibility map designates the areas of the country where properties can qualify for USDA loans.

Beyond that, these loans operate much the same way conventional and FHA loans do. Mortgage lenders offer USDA loans along with their other programs. Just like the other programs, they look at:

  • The loan size
  • The interest rate
  • The buyer’s income
  • A history of on-time bill payments

Borrowers must complete a certified homeownership education class to be eligible. The USDA program covers purchases, refinances and renovations to the property. It’s only available for primary residences and is offered as a 30-year fixed-rate only.

Benefits of USDA Loans

There are many advantages for borrowers to use a USDA loan.

  • No down payment required. Since saving for a down payment can hinder buying a house, this is a big help to many buyers.
  • Lower than average mortgage interest rates. Being able to secure a low fixed interest rate can save borrowers money on their monthly payments.
  • Private mortgage insurance (PMI) isn’t required. Since the loan is backed by the government, lenders don’t require costly PMI.
  • No out-of pocket closing costs. All closing costs for USDA loans can be rolled into the loan and paid as part of the monthly mortgage payment — but only when the home appraises for more than it is listed for.
  • Credit history doesn’t play as big of a role. USDA loans have less stringent credit requirements than other programs.

If you’re thinking about purchasing a home in a rural area, a USDA home loan may be the best option for you. Reach out to an experienced loan officer to talk about your options.

Are you ready to purchase a home? Contact MIG today to get started on your pre-approval mortgage process.

*Terms based on: USDA fixed first lien. 95% LTV. 6.50% Interest Rate. 7.053% APR. $239,898 Loan Amount, including upfront guaranty fee, with 360 monthly repayment of $1,516.32 per month. 720 Credit Score. Disclosed payment does not include PMI, taxes, insurance, or HOA fees. Rates as of June 14, 2023. Program qualification based on subject property. Income limits subject to change.