Last Updated on June 7, 2023 by Luke Feldbrugge
USDA home loans for teachers can give you an alternative way to afford a home in the rural community where you teach, or outside the city where you spend your week days. Teachers are notorious for finding different ways to accomplish a goal – you do it in the classroom everyday – so these loans may appeal to you. If living in the city doesn’t appeal to you, the USDA loan guarantee program could put you in a beautiful rural setting, outside the hustle and bustle of the city, or within the rural community where you teach.
A program from the U.S. Department of Agriculture doesn’t seem like a home buying opportunity at first glance. The USDA, however, has a rural development mandate, and its mortgage programs are designed to facilitate economic and community growth in rural areas. Since about a third of all teachers (32%) work in rural schools, this program may be the best deal for educators, teachers and school administrators.
Let’s take a look at this loan program and how it can help you save thousands of dollars.
What is a USDA Home Loan Guarantee?
USDA home loans for teachers offer a national program if you wish to buy a home in a rural area. The loans are guaranteed and insured by the USDA, even though the actual loans themselves come from private lenders and banks.
What’s rural, exactly? The USDA defines “rural” as a town with a population of less than 35,000 people and that includes 97% of the United States. That makes almost everywhere an eligible location for this program.
The USDA loan guarantees are part of the agency’s Single Family Housing Programs. There are actually two government programs overseen by the agency: one that is a loan guarantee for those with moderate incomes, and one that is a direct loan to low and very-low income families seeking affordable housing.
Single Family Housing Guaranteed Loan Program
The USDA loan program typically refers to their Single Family Housing Guaranteed Loan Program. This is a system where the federal government’s agriculture department stands behind you and your loan, as long as you meet the eligibility requirements. When a government agency stands behind a loan, essentially saying they will pay the mortgage lenders if you default, it carries a lot of weight with private lenders and banks. It reduces the private lenders risk and that makes them more eager to give you a home mortgage.
Single Family Direct Loan Program
The Single Family Direct Loan program is what it sounds like: a direct loan from the USDA. This is a rare bird. The federal government does a lot of loan guarantee programs (The VA loan and the FHA loan for example), but they rarely directly loan money to people for homes.
These loans are designed for low-and very-low-income applicants so they can, in the words of the USDA, “obtain decent, safe and sanitary housing in eligible rural areas.”
Ok, one more thing. This is not exactly a loan, but who knows, it may come in handy some day. The USDA also offers Home Improvement Loans and Grants that provide additional funds for very low income homeowners in rural areas.
Importance of Income Eligibility
Income levels are key to all of these programs, so we urge you to look at what the household income requirements are in your area before you think you won’t qualify. Not only do the guidelines vary by county and state, but the income guidelines apply to ALL adults living in the household. So, if your retired parents live with you, or your adult children are still at home full time, the income threshold is higher. Find out what the income eligibility is in your state.
Benefits of USDA Homes Loans for Teachers
The USDA home loan guarantee can save you, and other educators, thousands of dollars. The benefits of the guarantee include:
- No down payment. That’s the big one. Most mortgages require large down payments.
- USDA home loans for teachers have fixed interest rates, meaning your rate will always stay the same. Loan terms are generally 33 years, meaning you have that long to pay the loan back. This is longer than a typical conventional home loan, making payments even lower.
- USDA loans do not technically have a credit score minimum. However, most lenders will ask for a score at or above 640.
- You can use USDA home loans for teachers to build a new home or buy an existing home. You can also use the money to rehab, renovate or move an existing home.
- You are able to pay back the loan early with no penalties.
- It’s not just for first-time homebuyers. It’s for everyone looking for single-family homes.
- USDA loans for teachers are assumable. That makes them somewhat unique in the world of mortgages. An assumable loan lets you sign your current mortgage over to a potential buyer without all the paperwork and application process. Moreover, they can assume your loan at the interest rate you locked in when you bought it. That becomes a huge advantage for a seller in a real estate market where interest rates have gone up dramatically (like this year). Imagine telling your qualified buyers that they can assume your mortgage and get an annual interest rate of 3.3% while the rest of the world is paying 7%?
Since teachers are in high demand in rural areas, and the USDA home loans for teachers might be a great option if you need to move to a more rural area at some point in your career. Or, maybe you’re already renting in a district that is a USDA-defined rural and are looking to buy a house.
USDA Home Loans for Teachers Eligibility Requirements
As with most federally sponsored programs, there are some eligibility requirements. The first thing you need to do is check the USDA approved areas for your state. If you are looking for a house in a rural area that’s on their list, it might be time to talk to a Homes for Heroes loan specialist. Our experts can help walk you through the requirements and answer your questions.
Our loan specialists are committed to helping teachers – and other community heroes like law enforcement, healthcare workers, military, EMS, and firefighters – find an affordable mortgage. This is just one of the ways Homes for Heroes can help you with your home purchase.
USDA Home Loan Eligibility Criteria
- You must be a U.S. citizen, or meet certain noncitizen requirements.
- The home you buy with the USDA home loan must be your primary residence.
- Your household income doesn’t exceed 115 percent of the median household income of the area in which the eligible house is located.
- You are unable to get conventional financing with no private mortgage insurance (PMI).
There aren’t a lot of requirements from the USDA, but you also have to get a private lender or mortgage broker on board. They have their own list of requirements, listed below.
Good Credit History
There is technically no minimum credit score requirement for a USDA loan guarantee, but private lenders like to see scores of 640 or higher.
You can improve your credit score. Because credit scores and reporting are dynamic, it’s good to know the latest trends. For example, there was good news this year because people with lower credit scores are now allowed to include their on-time rent payments to the credit agencies to improve their credit scores. That means your rent can now give you a higher score.
How much can that help? TransUnion did a study back in 2017 that showed that the average increase in credit score was 16 points when rent was included. That’s the average, but the increase was a lot more for people with credit scores below 620.
If you need to improve your credit score, here are some tips for repairing or improving a poor credit score.
- Remove any errors or inaccuracies from your credit history report. The three credit reporting companies have online dispute forms:
- Pay all of your bills on time (early is better)
- Keep your credit card balance under 30 percent of your available credit limit
- Only open a new line of credit if you intend to use it over the long-term
- Don’t close existing lines of credit, even if you don’t use them
Some of these strategies will pay off right away, but some may take time. Increasing your credit score takes hard work and discipline. And it’s a marathon, not a sprint.
Stable Income and DTI
Lenders typically require that you have stable, regular income for at least the past two years. They will ask you for things like pay stubs from your job and W2 forms for the last two years. All of this is used to help the bank understand that you are a good credit risk and will be able to handle the mortgage each month.
Homes for Heroes lending specialists are accustomed to working with teachers, and understand the nature of your profession. For example, some educators choose to not receive a paycheck the months school is not in session. Our team gets that. They can also help you add your summer school or tutoring income to give a better picture of your work history. If you’re considering USDA home loans for teachers, or simply want to know more about what options are available to you, simply sign up today to speak with a member of our team. They will assist you and help determine if our local specialists are a good fit for your needs.
Another number you may see as you are looking at mortgages is DTI, which stands for Debt-To-Income ratio. This is expressed as a percentage. It’s basically a number that represents what you owe each month in debts compared to your income. The USDA has financial requirements around your DTI percentage, although they can be flexible if your credit score is high. The DTI number you will see most often is 41%, meaning your current debts take up only 41% of your net income.
Debts included in your DTI number include:
- Rent or mortgage payment
- Car loans
- Credit card monthly payments
- Student loans
Usually at the end of this list, you will see “other debts,” which is very vague. Just going to a website DTI calculator will give you a number, but this is another case where discussing your number with a professional loan officer might be a better idea. Generally you want to have a higher credit score and a lower DTI percentage.
USDA Home Loan Guarantees vs. Conventional Mortgages
When you compare a USDA guaranteed loan to a conventional mortgage loan, they have some elements that stand out. The “no down payment” is probably the most important benefit of USDA home loans for teachers. Nevertheless, there are some parts of a conventional type of loan that you should consider.
- There are income limits to buy a home with USDA home loans, based on your state and county. Conventional home loans do not typically have upper limits on your income when you are applying for a mortgage. In fact, the higher your income, the better it looks to a private lender or banker.
- You can use a conventional home loan for property anywhere. To get a USDA home loan, you must buy the property in a USDA approved area.
- USDA home loans for teachers must be used for your primary residence. Conventional loans can be used on any kind of home, including second homes, vacation homes, or cabins.
Mortgage Insurance: USDA versus Conventional
In the world of conventional loans, you often have to pay private mortgage insurance (PMI). It’s an add-on to your mortgage payment, and it can average $100-$300 per month. After a few years, when you have built up some equity, you will be allowed to stop paying this insurance.
With the USDA loan guarantee, you don’t have to pay PMI, but you do have to pay something. The USDA has a couple of fees you will need to pay to get the loan guarantee. Both fees can be folded into your mortgage loan so you don’t need to pay them up front.
There are two fees that USDA home loans for teachers charge at closing time.
- The Upfront Guarantee Fee consists of 1% of your mortgage total.
- The Annual Fee is a yearly premium that adds 0.35% of your loan amount to your bill. It lasts for the life of your loan.
These fees, it must be said, are quite a bit less than you would pay if you had private mortgage insurance with a conventional loan.
USDA Property Requirements: Appraisals and Inspections
The USDA will require an appraisal before they guarantee your loan. An appraisal lets both the federal agency and your private lender know that the property you are purchasing is worth what you are paying. If it’s overpriced, they may not approve the mortgage.
It’s important to understand the distinction between an appraisal and an inspection. An appraisal evaluates the financial value of the property. The inspection is for your safety and to make sure you don’t end up in a money pit. The inspector will dig, literally and figuratively, into the house and all its elements: plumbing, wiring, HVAC, structure and more.
The USDA does not require an inspection, but it’s highly recommended (and your private lender may require it).
In addition to an appraisal, the USDA eligible homes must be:
- The home must be less than 2,000 square feet.
- The property cannot have an in-ground swimming pool.
- You can not use the property for anything relating to producing income.
Additional Savings with Homes for Heroes
USDA home loans for teachers may be the best option for teachers who are looking for a new home in a rural area. Homes for Heroes can help in two ways.
Primarily, because you need a private lender to give you the USDA loan. We can connect you with our local mortgage specialist who has prioritized working with their community heroes (and that means teachers, first responders, healthcare workers and military members). We have a national network of committed mortgage brokers in every state who have signed on to help community heroes. Having these lenders on your side, and working with you, can make a huge difference in getting the USDA guarantee approved.
Second, we have a team of real estate professionals who can help you every step of the way – from initial search to closing on a home.
Finally, we provide you with Hero Rewards® savings after closing that averages $3,000. It our team’s way of saying thank you for your educational services.
Sign up today to speak with a member of our team to discuss your needs and how we can assist. It’s free to sign up, and there’s no obligation for you. We would be honored to serve you.