Rural development loans for Minnesotans: Your questions answered

If you live in rural Minnesota but owning a home seems out of reach, a rural development loan can help you achieve your dreams. Even if you don’t have funds for a down payment and your credit score isn’t where you’d like it to be, federally backed loans can address these common issues.

What’s a rural development loan?

These are lending programs meant to help rural communities prosper and thrive. This blog covers the USDA Rural Development Guaranteed Housing Loan Program.

Here’s what the Guaranteed Housing Loan Program offers in a nutshell:

• No down payment required.
• Lower interest rates.
• More flexible credit history requirements.
• Open to first-time homeowners as well as previous homeowners.

If a rural development loan sounds like money from the government, in this case, it’s not. Here’s how the Guaranteed Housing Loan Program works:

• Participating lenders like Minnwest Bank grant these loans and collect loan payments.
• In exchange for lending money to less qualified borrowers at more favorable terms, the USDA guarantees the loan for the private lenders.
• Communities benefit from gaining a more stable tax base and vested citizens.

Which properties are eligible for rural development loans?

As a rule, single-family homes located in an eligible, rural area qualify for a rural development loan, and this includes:

• Existing homes.
• New construction homes.
• Townhouses and condos.

What’s the required credit score for a rural development loan?

If you’re applying for a mortgage under the USDA Rural Development Guaranteed Housing Loan Program, lenders will be pulling your credit score. It’s one of several indicators they’ll look at to determine your ability and your willingness to repay the loan.

Before you apply, be prepared. The following are not requirements, per se. But reaching these standards can raise your chances of loan approval:

• Employment history, with dependable income for the past 24 months.
• Three years of credit history, with a credit score of at least 640, with no collections within the past 12 months.
• A debt-to-income ratio that doesn’t exceed 41%.

Are rural development loans good?

Like anything, a rural development loan can be a life-changer for some, while others might find the requirements limiting. Here’s a quick rundown of the pros and cons.

Rural development mortgages: The upsides to borrowers

• No down payment and competitive interest rates make homeownership more accessible to rural low- to middle-income borrowers.
• Short on cash for closing? No problem. Closing costs can be folded into the loan, up to 101% loan to appraised value.
• No penalty for early repayment.
• Stable, predictable payments. These are fixed interest rate loans, so your monthly principal + interest payment never changes in the life of the loan. (Property tax and homeowner’s insurance fluctuations, however, will affect your payment.)

Rural development mortgages: Things to consider

• Restrictions on location: The property you buy has to be in an eligible rural area to qualify. Check out the USDA's Eligibility Site to search the map to review general eligible areas.
• Restrictions on purchase. Your monthly payments — including insurance and property taxes — cannot exceed 29% of your monthly income.
• Restrictions on income. Rural development housing loans aren’t for just any borrower looking to put down roots. Your adjusted household income must be equal to or less than 115% of the area median income.
• Monthly private mortgage insurance payments.
• Property limitations. If you had hopes of, say, leasing part of the residence or purchasing a duplex, these aren’t permitted uses under rural development loans.

How much home? Rural development loan calculator

When you’re considering a rural development loan toward the purchase of your new home, running some scenarios through a mortgage calculator can help you see if you’re ready to buy.

Minnwest Bank’s “How Much Home Can I Afford?” online calculator is a good starting place. As you work backward from your ideal payment, you can quickly determine whether the monthly payments from a USDA rural development loan fit your family’s budget.

Monthly payment information

Start with a monthly payment your budget can afford. For example, you can start with your current monthly rent payment. With this figure, you’ll see how that monthly payment grows your wealth over time.

Loan information: Down payment

With a USDA rural development home loan, the down payment is optional. So if you have the funds, whether through savings or a gift from a relative, you can use this calculator to decide whether to hang on to the cash for future expenses or invest it into the home — or a combination of both.

Loan information: Interest rates

Before entering a figure in this field, find the average interest rates for mortgages with a little research on current interest rates. It’s important to understand you can’t know your interest rate until you meet with a lender. The idea of this form is to help you get an idea of what your loan and monthly payment might look like.

Meet with the experts!

It’s not easy for the average borrower to tell if they qualify for the USDA Rural Development Guaranteed Housing Loan Program. At Minnwest Bank, our door is open to answer your questions. We're here to help you identify the best possibilities for you and your family. Learn more about our mortgage program and reach out to a mortgage banker in your community today. All applications are subject to credit approval.