There are several government-backed mortgage programs to help very-low and low-income Americans. FHA, for instance, offers a low-down payment option for those who qualify.
The Department of Agriculture Section 502 loans are the only federal programs, however, that offer loans to not only low-income Americans, but very low-income buyers as well.
In fact, “… the annual average income of a direct borrower is $27,500 and 80% of borrowers have annual incomes that do not exceed $35,000,” according to the National Rural Housing Coalition’s 502 Success Paper.
Highlights of the program include:
- Borrowers do not need a down payment
- The direct loan’s interest rates start at 1 percent
- The program offers payment assistance, making the loan affordable to many who might otherwise not be able to afford a home.
- Borrowers must attend homebuyer education classes and sign a document stating that the subsidy will be repaid.
The loan
Many homebuyers who research what the USDA offers don’t realize that two loans are offered as part of the Section 502 program. One is a guaranteed loan (much like the FHA loan) while the other is a direct loan from the government. The latter is what we’re covering today.
The direct loan is provided by the government, which acts as the loan’s servicer as well. This means the borrower makes all payments directly to the government. Because the government is the lender, it can be more flexible on income limits than conventional lenders.
Borrower eligibility
USDA’s Section 502 direct loan program is open only to American citizens and legal residents with very low incomes.
Unlike conventional lenders, the USDA does not have stringent credit score requirements, but will ensure that the borrower has a history of responsible use of credit and has the ability to repay the loan.
To learn if your income qualifies, visit USDA.gov and click on the abbreviation for your state.
Additional eligibility requirements include that the borrower must:
- Not currently have “… decent, safe and sanitary housing,” according to the USDA.
- Not be able to obtain a mortgage on conditions that you can meet from other resources.
- Agree to live in the home permanently, until it is sold.
- Be a U.S. citizen or eligible non-citizen.
- Have the legal capacity to incur a loan obligation
- Be in good standing from previous participation in any federal program
The home you choose to purchase must match the criteria
The home you choose must be modest in size, design, cost and amenities. The USDA considers homes with a square footage under 1,800 square feet modest and amenities must not include a swimming pool or any income-producing buildings.
Now, here is the tricky part: The property must be located in an “eligible area” the USDA defines as rural.
There’s an easy way to find out if a home you have your eye on will qualify. Go online to the program’s website, read the Property Eligibility Disclaimer and, if you agree with it, click on “Accept” on he right side of the page. Enter the property’s address in the search bar.
Subsidy Calculation
Mortgage payment subsidies are based on the applicant’s income, and determined at the time the loan is approved.
The USDA website offers consumers the Single-Family Housing Direct Self-Assessment tool. Here, you can enter your information to learn if the Section 502 Direct Loan is a good fit for you.
