USDA Loans in Indiana A Complete Guide

USDA home loans Indiana are a part of a government-backed program that can help overcome some of the challenges potential homebuyers encounter in today’s market.

Saving the down payment—about 3-5% of the home price—is often the biggest problem. Because of this and other difficulties, conventional mortgages may be out of reach for thousands of Americans.

But USDA loans Indiana remove the need for a down payment.

With options like that, it’s no wonder these loans are a popular option for residents of the Hoosier state.

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What is a USDA loan?

USDA loans were created to help energize the economy and culture of rural locations in America. They’re sometimes known as

• The Rural Development Loan
• An R.D. Loan
• A Section 502 Guarantee Loan Program (named after the section in the USDA rulebook that details this program)

These are just different names for the same program (let’s call them USDA loans here).

The main features that attract borrowers to USDA loans are

• Housing loans for low to moderate-income borrowers
• Lower interest compared to most conventional loans
• No downpayment needed

There are a few USDA loan requirements to be met. The biggest rule is the property must be in an area deemed eligible by the USDA.

USDA-eligible areas in Indiana

When the USDA checks your loan application, they will see if it’s in an area they deem rural.

The term “rural” does not necessarily mean farmland—it could just as easily be in a suburban-like neighborhood. These loans are not for farms or even large plots. They are for the typical American single-family home that happens to be located in a less-dense area.

The best way to check an area’s eligibility is to use the USDA’s interactive eligibility map, which shows a detailed topography of every state and its rural areas.

ProTip: A city or town with a population of up to 35,000 might still be considered “rural.” A key factor is if the region has rural characteristics plus lower levels of mortgage credit for low-to-moderate-income households. 

Here are five examples of urban centers in the Hoosier state that have approved lands within commuting distance to give you a better idea of what an eligible area looks like.

Note: All non-shaded areas are eligible.

Lafayette, Indiana

The city of West Lafayette and Lafayette are parts of the home of Purdue University, a place rich with beauty and Midwest tradition. A vibrant downtown spans both cities, forming the heart of the community. Unemployment here is quite low at just 2.9%, and you can find many eligible areas east of Highway 65 and west of 231.

Median home prices in Lafayette are $220,000, and $329,900 in West Lafayette.

Fort Wayne, Indiana

As the second-largest city in the state, Fort Wayne has sat at the convergence of three rivers in the north for more than 200 years. Its thriving culture includes a vibrant art scene, historical attractions, and many tasty restaurant options.

There are many USDA-eligible areas close to highway 469, enabling easier commuting. Unemployment matches the state average at a low 2.8%.

The price range of homes for sale in Fort Wayne is $3,000 to $2.8 million, but the median price is a very reasonable $214,900.

South Bend, Indiana

Located at the northern edge of Indiana, South Bend isn’t just for football fans who flock to Notre Dame to watch the Fighting Irish. This picturesque town also features historic mansions, the Morris Performing Arts Center, The National Studebaker Museum, and many more attractions for residents and visitors alike. The sprawling core of downtown Chicago is only an hour and forty minutes away. Though South Bend is a city of over 100,000, USDA-eligible areas such as Lakeville and New Carlisle are only a twenty-minute drive to the center of town.

The median housing prices in South Bend are a very reasonable $175,000.

Evansville, Indiana

Founded in 1812, the city of Evansville is situated along a scenic bend in the Ohio River and is the third-largest city in Indiana. This vibrant city is the region’s economic and social hub, including Southeast Illinois, Southwest Indiana, and Northern Kentucky. The city has a population of nearly 121,000, with more than 300,000 in the metropolitan area. Towns like close-by Chandler and Spottsville, Kentucky are within 30 minutes of the city center.

Evansville’s median home price is only $175,000.

Indianapolis, Indiana

Four major interstates pass through the city limits of Indianapolis, and it is the biggest urban center in Indiana, home to the famous Indianapolis 500 (part of the Triple Crown of Motorsport) and the Colts NFL team. Check out the Indianapolis Cultural Trail for outdoor activities—an urban bike and pedestrian path that weaves eight miles through cultural districts and neighborhoods and past some of the city’s best attractions. Towns such as Mooresville and Danville to the west and New Palestine and Fortville to the east are USDA-eligible.

With a median home price of only $239.9K, Indianapolis is well below the national median of $454,900.

USDA loan income limits

Just like generous eligible areas, USDA loans Indiana offer very liberal income limits. You might think income limits are too low for most people to qualify, but you would be surprised.

Your household income must be in the “low-to-moderate” range. But there is a bit of a loophole for this rule.

If you are above the standard moderate-income level, so long as you don’t exceed 115% of the median income for the area, you may still qualify.

So, what are the income levels for Indiana?

For mid-2022 to mid-2023, the USDA set the same standard income level for every county in Indiana—depending on how many members are in your household.

• Households with 1-4 members have an income limit of $103,500
• Households with 5-8 members have an income limit of $136,600

Therefore, regardless of what county in Indiana you are interested in, the same income limits will apply. Check out the chart below to see what we mean. 

Pro Tip: Regarding income limits, all adults over 18 in the household will have their income counted, even if their names are not on the application. This rule was created to ensure that the program is available to those who need it most. In regards to qualifying for the loan itself, the lender will consider income fromthose who are one the application.

If you are doing your own calculations for your income, here are some suggestions for deductions.

• Childcare expenses (under age 12)
• Dependents living at home
• Certain medical expenses
• Care of household members with disabilities

You can also try using USDA’s income tool to see if your income level qualifies.

Pro Tip: It’s also good to check directly with a USDA lender to see if your calculations are correct.

What Employment and Income Stability is Needed to Qualify for a USDA Loan?

To qualify for a USDA loan, demonstrating stable employment and a consistent income is key. Lenders generally look for applicants who have maintained employment in the same position or industry for a minimum of two years. This continuity reassures lenders of your ability to manage regular mortgage payments.

Key Factors:

• Employment Duration: Aim for at least two years in your current job or within the same field.
• Income Consistency: It’s important to show a steady income stream. This assures lenders of your capacity to repay the loan over time.

Keeping these guidelines in mind will improve your chances of obtaining a USDA loan. Establishing a reliable financial track record not only supports your loan application but also boosts your financial health.

Down payment requirements

Homebuyers turn to USDA loans because they don’t need a down payment for approval. This rule means you can even apply for the entire purchase price of the house through financing—so long as the appraised value matches or is greater than your offer price.

Pro Tip: Even though you don’t need funds for a down payment, closing costs of about 2-5% still need to be paid. However, a special feature of USDA loans Indiana allows these funds to come from normally excluded sources like

• gift funds
• seller credit
• lender credit
• or other eligible sources

USDA loan limits in Indiana

When considering USDA loans, it’s important to note that they don’t impose a maximum purchase price. Unlike some other loan programs, USDA loans allow flexibility in the purchase price, as long as the borrower meets the income eligibility requirements. This means that, theoretically, you could purchase a property of any value. However, practical limits do exist based on your financial situation.

Like its requirements for down payments, a Guaranteed USDA loan doesn’t impose any loan limits. However, a limit is created indirectly based on your debt-to-income ratio (DTI).

What does this mean? Here’s an example.

If your income is $103,500 (the limit for all areas of Indiana), that works out to $8,625 per month. Next, the lender will check two aspects of your debt load—your potential monthly payments for this mortgage and the sum of any other payments you are currently paying.

Breaking it down, it will look something like this.

Monthly income $8,625 Principal, Interest, tax, insurance, HOA, mortgage insurance $2,500 Front-end debt-to-income 29% Student loans, auto loans, all other payments $1,000 Back-end debt-to-income 41% Example mortgage rate 6.5%* Estimated home price based on the above $325,000 *These rates, payments, and fees are for example purposes only. Your personal finances will vary from these.

In summary, while there’s no strict cap on the purchase price with USDA loans, the real determining factor is your income and DTI. This ensures that borrowers take on a mortgage they can manage, providing a balance between flexibility and financial responsibility.

*These rates, payments, and fees are for example purposes only. Your personal finances will vary from these.

Debt-to-income ratio

In the above example, the ratio is called 29/41. This ratio also happens to be the standard DTI maximum—but, once again, there is a bit of a loophole here.

If your lender uses a USDA-specific underwriting tool named the GUS (short for Guaranteed Underwriting System), you might still be approved even if your DTI ratio crosses the maximum.

All lenders, as it turns out, use the GUS system to assess eligibility (although in some cases, GUS can’t approve the file automatically, so the lender must do a manual review). In cases where the borrower is approved with a DTI over the maximum, they typically had extra financial incentives like a high credit score or similar factors.

USDA home loan mortgage rates in Indiana

If it is one of the products they offer, lenders tend to like using USDA loans for their clients.

Why? Because every USDA loan comes with government backing that makes this loan product appealing. If a borrower defaults on the loan, then the government guarantees that up to 90% of the original loan amount will be paid back to the lender.

This guarantee allows you to access lower rates and fees as the applicant.

Property condition requirements

Similar to the FHA requirement about properties, the USDA stipulates that the property you are considering buying must be safe and liveable.

This rule does not mean that the property needs to be immaculate or in perfect condition. Minor cosmetic issues like peeling paint or an unkempt lawn are not likely going to be something that will deny the loan.

Major structural issues or outdated or non-functioning electrical or plumbing systems will have to be repaired before closing the loan.

Pros and cons of a USDA loan

Any loan product, USDA loans Indiana included, will have a few drawbacks. Let’s break down the major pros and cons of these loans.

Pros

Firstly, there is no requirement to include a down payment with your offer. A big plus.

Second, lenders will often offer more competitive rates due to the government guarantee included with every USDA loan.

Third, while closing costs exist, borrowers can pay for them with funds from eligible sources outside their own money.

Finally, mortgage insurance costs are typically lower than FHA loans.

Cons

Any house you’re considering must be in a location that the USDA deems as “rural.”

Second, there are limits set on the income for the entire household.

Third, an extra step in processing USDA loans can cause processing delays of perhaps a few days to a few weeks.

Finally, compared to conventional loans, USDA loans have higher standards on the property that must be met.

USDA vs. FHA vs. Conventional

FHA loans: The biggest difference with FHA loans is there are no income limits, and they don’t exclude geographical areas. FHA loans need at least 3.5% down, but they can come from a down payment assistance program or a gift.

VA loans: VA loans are only available to eligible military service members.

Conventional loans: Like FHA loans, conventional loans require a down payment. Some lenders might approve a loan with as little as 3% down—but only to borrowers with reliable incomes and high credit scores.

Indiana first-time homebuyer grants and programs

Many states offer assistance programs to help first-time homebuyers with financial obstacles—Indiana is no exception.

First Place program

To help with closing costs and/ or the down payment, the Indiana Housing and Community Development Authority (short form: IHCDA) First Place program gives first-time homebuyers assistance to pay for these requirements. They do this through an offer for a second mortgage of up to 6% of the purchase price.

You don’t have to pay an additional mortgage payment for this second mortgage, and there are no additional interest charges, either. So long as you live in the house for nine years and keep up with all your other responsibilities as a homeowner, you’ll be forgiven for the second mortgage. You must pay the second mortgage if you sell before the agreed period.

Mortgage credit certificate

Also available is Indiana’s mortgage credit certificate program (MCC), which can help reduce your tax bill.

This program is a federal income tax credit for homebuyers in Indiana. The credit can equal 25% of your borrowed amount, up to $2k per year, which can significantly affect your tax bill—especially over a 30-year mortgage term. You can also use this program in tandem with the final one listed here: the Next Home program.

Next Home

Another option from the IHCDA to help make your purchase more affordable is the Next Home program (N.H.). This program is also targeted toward reducing your down payment cost, but only for 3.5% of the purchase price. On the positive side, however, you don’t have to be a first-time buyer to be eligible.

As with any government program, specific requirements need to be investigated directly to determine your qualifications.

Credit score minimum for USDA loans

The lender, not the government, sets the minimum standards for a borrower’s credit score. A side-effect of this is it enables low-score borrowers to shop around for a USDA lender that accepts their current score.

In general, most USDA lenders are looking for a borrower with a credit score of a least 620-640. Lenders might go as low as 580 in some cases, but this is pretty rare.

USDA loans Indiana mortgage insurance

Every USDA loan, whether you are in Indiana or elsewhere, will have a special fee added to the cost. This fee was created to ensure the sustainability of the USDA loan program—a kind of pay-it-forward fee.

There are two ways this fee can be calculated.

Guarantee fee

The Guarantee fee version equals 1% of the loan and must be paid upfront upon closing. All lenders, however, allow you to include this fee as a part of the loan.

Annual fee

The other version is the Annual fee—calculated at 0.35% of the outstanding balance each year and is typically included in your monthly mortgage payment.

Do USDA Loans Require Private Mortgage Insurance (PMI)?

No, USDA loans do not require private mortgage insurance (PMI), setting them apart from many other low down payment mortgage options. Instead of PMI, USDA loans incorporate a different fee structure, which includes:

• Upfront Guarantee Fee: This one-time fee is typically about 1% of the total loan amount. Borrowers have the option to finance this fee into the loan itself.
• Annual Fee: Calculated at approximately 0.35% of the outstanding balance, this cost is divided into monthly payments.

Despite these fees, USDA loans often prove to be more cost-effective than conventional loans that require PMI. This unique structure can result in lower overall expenses for eligible borrowers.

USDA Guaranteed Loan or Direct Loan—what’s the difference?

An important aspect to understand about USDA loans is that there are two types: Guaranteed and Direct.

Guaranteed loans

• These are the majority of USDA loans—and the above information almost entirely applies to these types of loans
• They are issued by private mortgage lenders—not the government
• Designed for moderate-income earners

Direct loans

• Issued and managed by the government directly
• Ideal for households with low to very low incomes ($31,550 to $50,500/year in most areas)

Can USDA loans be assumable by another buyer?

Yes, USDA loans can indeed be assumable by another buyer. This means that a qualified buyer can step in and take over the existing mortgage from the seller. This process can be particularly advantageous if the original loan has a lower interest rate than what’s currently available in the market.

Can USDA Loans Be Used for Vacation or Investment Properties?

USDA loans are specifically designed for borrowers looking to purchase a home in rural areas. However, these loans come with certain conditions. One of the key requirements is that the property must be the borrower’s main place of living.

Here are some important points to understand:

• Primary Residence Requirement: USDA loans strictly mandate that the property be used as the borrower’s primary residence. This means you cannot use these loans for purchasing vacation homes.
• Investment Property Restrictions: Similarly, USDA loans do not support the purchase of investment properties where the borrower does not reside. The intention is to promote homeownership in less urbanized areas.
• Focus on Rural Living: As part of the USDA‘s mission, these loans encourage families to settle in rural communities, bolstering local development.

In summary, if you’re considering purchasing a vacation home or looking for an investment opportunity, USDA loans won’t be applicable. Instead, they’re best suited for those intending to live in the home full-time in eligible rural areas.

The qualifying rules for these Direct Loans are generally stricter than Guaranteed Loans. To understand the process of these loans better, check out the USDA Direct Loan website.

What Are USDA Construction Loans, and How Do They Benefit Borrowers in Indiana?

USDA construction loans are specialized financing options backed by the United States Department of Agriculture. They’re designed to assist eligible borrowers in both acquiring land and building a new home, all within a single loan package. This can be especially advantageous for those seeking to build in more rural settings.

Benefits for Borrowers in Indiana

1. Comprehensive Financing: These loans streamline the process by covering both land purchase and construction costs, eliminating the need for separate loans.
2. Accessibility for Rural Areas: Indiana has vast rural regions where housing options might be limited. USDA loans make it easier for residents to construct homes in these areas, fostering community development.
3. Single Closing Process: With a USDA construction loan, borrowers face only one closing, simplifying the logistics and potentially saving on closing costs.
4. Low Down Payment: Often, USDA loans require little to no down payment, making home construction more accessible to people with limited savings.
5. Competitive Interest Rates: These loans typically offer favorable rates, which can result in long-term savings.

In summary, USDA construction loans offer a seamless and cost-effective way for Indiana residents to build their dream homes, particularly in rural areas where options might otherwise be restricted.

How Pre-Approval for a USDA Loan Boosts Your Home Buying in Indiana

Securing pre-approval for a USDA loan in Indiana can significantly enhance your home buying journey. Here’s how it helps:

1. Clarifies Your Budget: Pre-approval provides a clear picture of how much you can afford. By submitting essential financial information, you’ll receive a detailed report on your borrowing potential, ensuring you shop within your price range and avoid any financial surprises.
2. Increases Credibility: When you’re pre-approved, it signals to sellers that you’re a serious and qualified buyer. This can give you an edge in competitive markets where multiple offers are common, positioning you favorably in the eyes of the seller.
3. Speeds Up the Buying Process: With pre-approval in hand, you are prepared to make quick decisions. This can expedite the closing process since much of the paperwork is already complete, allowing you to focus on finalizing the best deal.
4. Negotiating Power: Pre-approval can strengthen your hand in negotiations. Sellers are more likely to consider offers from buyers who are pre-approved since it indicates financial reliability, which can lead to more favorable terms.

By navigating the home buying process with a USDA loan pre-approval, you’ll have the confidence and leverage needed to successfully secure your dream home in Indiana.

The process of applying for USDA loans Indiana

Applying for a USDA loan is essentially the same process you would go through if you were applying for a conventional or FHA loan, with one specific difference.

If the private lender approves your application, it must be forwarded directly to the USDA to review it for compliance with its rules. This extra step usually delays the processing—depending on backlogs—a few days to a few weeks. The easiest way to see if there are any backlogs is to review the USDA website.

The good news is the borrower doesn’t have to submit the application themselves; the lender will do that for them.

Here’s a breakdown of applying for USDA loans in Indiana.

1. Apply for a loan with an approved lender: Start by choosing a lender who is approved to offer USDA loans in Indiana. Look for one with experience in these specialized loans and a proven track record.
2. Submit all relevant documents: Work with your chosen lender to get pre-approved by submitting preliminary financial information. This step determines how much you might be able to borrow and strengthens your position when making offers on homes.
3. Make an offer on the home once you find the right place: With pre-approval in hand, begin your search for homes in USDA-eligible areas of Indiana. Once you find the right property and your offer is accepted, it’s time to move forward.
4. The lender will order a property appraisal: Your lender will order an appraisal to ensure the property meets USDA standards. This is a crucial step in the underwriting process.
5. The lender submits your application to the USDA for review: During underwriting, the lender reviews your comprehensive documentation of income, assets, and debts, along with the property details.
6. If approved, the lender finalizes the paperwork for you to sign: Upon USDA approval, you’ll transition to the closing phase. Here, the lender finalizes all necessary paperwork.
7. You sign the offer, and you have your new home! At closing, you’ll sign the final documents and receive the keys to your new home, marking the successful completion of securing your USDA loan.

How can borrowers manage their finances and determine the right time to apply for a USDA loan in Indiana?

Manage Your Finances Efficiently and Time Your USDA Loan Application in Indiana

Navigating your financial future and determining the optimal time to apply for a USDA loan in Indiana can be straightforward with the right tools. Here’s how borrowers can take control and make informed decisions:

1. Leverage Financial Management Apps
   Utilize financial management apps like Mint or YNAB (You Need a Budget) to track your income, expenses, and savings. These tools offer insights to help you identify when you’re financially prepared for a major commitment like a USDA loan.
2. Consult with Loan Experts
   Initiate conversations with financial advisors or mortgage professionals who specialize in USDA loans. Their expertise can guide you through the process of assessing your financial health and readiness.
3. Streamline Your Loan Application
   Use digital platforms from recognized financial institutions to streamline the application process. These platforms often provide comprehensive support and resources, helping you prepare the necessary documents and meet eligibility requirements.
4. Monitor Interest Rates and Loan Terms
   Stay informed about current interest rates and any changes in USDA loan terms. This will equip you with the knowledge necessary to decide when it’s most beneficial for you to apply.
5. Evaluate Your Financial Goals
   Take time to reflect on your long-term financial objectives. Understanding your goals will help you prioritize your spending and savings, ensuring you are in a strong position to take on a USDA loan when the time is right.

By employing these strategies, borrowers in Indiana can effectively manage their finances and time their USDA loan applications to align with their financial situation.

USDA loans Indiana FAQ

Streamlined Refinancing for USDA Loans

If you’re looking to refinance an existing USDA loan, you’re in luck. USDA loans offer a streamlined refinancing option, designed to simplify the process and make it more accessible for those who qualify.

Key Features of USDA Streamlined Refinancing:

• Eligibility: This program is available to homeowners who already have a USDA loan. It’s tailored to ease the transition to potentially lower interest rates, should they become available.
• Reduced Documentation: Unlike traditional refinancing, this process often requires less paperwork, helping you save time and effort.
• Appraisal Requirements: In many cases, an appraisal may not be necessary, which can reduce costs and speed up the refinancing process.

How Does It Compare to Other Loans?

USDA loans are unique when compared to other government-backed loans. Unlike FHA loans that usually demand a down payment, USDA loans might not require one at all. Also, while VA loans are exclusively for veterans and service members, USDA loans are based on factors like income and geographic location, making them accessible to a broader audience.

This streamlined refinancing option not only makes it easier to adjust your financial commitments but also leverages the current market conditions, potentially leading to significant savings. Whether you’re looking to lower your monthly payments or secure a better rate, USDA’s streamlined approach could be the answer.

Get started on your USDA loan in Indiana

The fastest way to find out if you meet USDA loan requirements is to talk to a participating USDA lender.

Thousands of low-to-moderate-income Americans have achieved the dream of homeownership using this powerful program.