USDA Home Loans : 100% Financing And Very Low Mortgage Rates
For home buyers today, there are two mortgage programs which offer 100% financing. The first is the VA loan from the Department of Veterans Affairs. It's available to most active military personnel and veterans nationwide.
The other program is the U.S. Department of Agriculture's Rural Development Single Family Housing Loan Guarantee Program.
Sometimes called a "Rural Housing Loan" or a "Section 502" loan, today's USDA financing isn't just for farms. Because of the way the USDA defines "rural", there are plenty of exurban and suburban neighborhoods nationwide in which USDA loans can be used.
Home buyers who buy a home in a qualified USDA area, and who meet USDA income eligibility requirements, can take advantage of the USDA's low interest rate, no downpayment mortgage program.
What Are The Benefits Of A USDA Home Loan?
USDA mortgages are structured just like conventional ones via Fannie Mae and Freddie Mac. Where they differ, though, is with respect to downpayment requirements and mortgage insurance.
Unlike conventional loans, USDA mortgages have no down payment requirement, which allows a home buyer to finance a home for 100 percent of its purchase price. The U.S. Department of Agriculture will assess a two percent mortgage insurance fee to all loans, and the cost may to be added to the loan size at the time of closing, as can the costs of eligible home repairs and improvements.
You can't do that with a Fannie Mae or Freddie Mac loan.
Another "RD Loan" advantage is that its annual mortgage insurance fee is just 0.40% annually, no matter how large or small of a downpayment. This is less than half of the private mortgage insurance charged via a comparable conventional loan, and up to one-fourth of what the FHA will charge.
Furthermore, because USDA home loans do not have a specific loan size limitation, home buyers can theoretically borrow more money with a USDA mortgage than via conventional, VA or FHA routes.
Loans insured by the U.S. Department of Agriculture are available as 30-year fixed rate mortgages only, and come with their own USDA Streamline Refinance program.
How Do I Qualify For A USDA Home Loan?
Similar to FHA home loans, rural housing loans aren't made by the USDA. Rather, the USDA insures mortgage lenders making USDA Section 502 loans against loss. The program is meant to spur homeownership in rural and underdeveloped areas.
In order to qualify for a USDA home loan, home buyers must meet two requirements.
First, the buyer must buy a home in a USDA-eligible area. In general, USDA property eligibility is governed by census tract density. However, the term "rural" leaves room for interpretation, opening Section 502 mortgages to buyers in unexpected parts of the country.
For example, huge swaths of California are USDA Rural Loan-eligible, as is most of the Midwest. Even New Jersey is stuffed with USDA-eligible homes.
A buyer's second USDA eligibility requirement is that household income may not exceed 115% of the area's median income. A mortgage lender can tell you whether your income meets program requirements, if you're unsure how to check.
There are other USDA qualifying criteria, too, including :
- The subject property must be a primary residence
- The buyer must be at least two years seasoned from a bankruptcy discharge
- The buyer must have decent credit
- The buyer must meet a qualifying ratio of 29 percent for housing costs; and 41 percent for total debt
- The buyer may not own another home within commuting distance of the subject property
However, it's important to note that these guidelines are not steadfast -- specifically, with respect to credit scoring and debt-to-income ratios. There is no minimum credit score requirement with the USDA mortgage program, nor is there a minimum tradeline requirement. Buyers are evaluating on the overall strength of their loan application.
This is also why the 29/41 debt ratios can be waived. A buyer which can show a strong credit score, for example, or deep reserves can generally get approved with debt ratios in excess of the recommended limits.
For How Much Can I Get Approved With USDA?
For today's home buyers, mortgage rates remain low and USDA home loan guidelines remain loose. The program is designed for leniency so long as the buyers meets the USDA's property and income eligibility requirements.
Note, however, that the USDA changes its "rural areas" fairly regularly and an expanding town is apt to lose its rural loan eligibility with the next census tract update, planned for late-March 2013. Homes which are USDA-eligible today may not be USDA-eligible in April.
Get help with your rural home loan and determine your personal eligibility. See for how much of a mortgage you can be USDA-approved.