100% Financing For Suburban And Rural Homes : The Complete USDA Mortgage Guidelines (Plus Mortgage Rates)
This USDA / Rural Housing loan information is accurate as of today, April 23, 2014.
If you get your USDA home loan information elsewhere, double-check the publish date of the article to make sure that it's current.
About The USDA / Rural Housing Mortgage
If you've never heard of the USDA loan program, you're not alone. It's a niche product serving a fraction of the U.S. housing market, and most banks don't offer them. However, many suburban and rural home buyers can use it.
The program's full name is the USDA Rural Development Guaranteed Housing Loan program. Most people call them "USDA loans", "Rural Housing Loans" or "Section 502 loans".
USDA loans are insured by the U.S. Department of Agriculture and the program's biggest feature is its option for "no money down" financing. Via the USDA, you can finance 100% of a home's purchase price while getting access to better-than-average mortgage rates.
Beyond that, USDA loans are similar to other common loan types. The repayment schedule is "normal", closing costs are standard, and there are never prepayment penalties to pay. Where USDA loans are different, though, is with respect to its downpayment requirements and its simpler loan approval standards.
Rural loans can be used by first-time buyers and repeat home buyers alike. Homeowner counseling is not required to use the USDA program.
USDA Loans Require Mortgage Insurance
The Rural Housing Loan program is a product of the U.S. Department of Agriculture. It's partially funded, however, by program borrowers. Similar to the Federal Housing Administration's FHA mortgage, the USDA uses homeowner-paid mortgage insurance premiums to keep the USDA home loan program going.
Since October 1, 2012, USDA mortgage insurance rates have been :
- For purchases, 2.00% upfront fee paid at closing, based on the loan size
- For refinances, 2.00% upfront fee paid at closing, based on the loan size
- For all loans, 0.40% annual fee, based on the remaining principal balance
As a real-life example : A homebuyer with a $100,000 loan size in Blacksburg, Virginia, would be required to make a $2,000 upfront mortgage insurance premium payment at closing, plus a monthly $33.33 payment for mortgage insurance.
Note, however, that the USDA upfront mortgage insurance is not paid as cash. It's an amount added to your loan balance.
USDA mortgage insurance rates are lower than those for a comparable FHA or conventional mortgages. FHA mortgage insurance premiums assess a 1.75% upfront mortgage insurance premium and charge as much as 1.55% in MIP annually. Conventional MI can be similarly high.
Even better, USDA mortgage rates are often the lowest between FHA, VA and conventional mortgage rates.
Summarizing The USDA / Rural Housing Mortgage Program
The USDA loan guidelines are straight-forward. You must qualify for the program and your home must, too. Here are some common USDA mortgage questions.
How do I check if my home is USDA / Rural Housing-eligible?
With the USDA Rural Housing Program, your home must be located in a rural area. However, the USDA's definition of "rural" is quite liberal. Many small towns meet the "rural" requirements of the agency, as do suburbs and exurbs of most major U.S. cities.
What is the USDA program's minimum downpayment?
The USDA has no downpayment requirement. You can finance 100% with a USDA loan.
Is the USDA loan program limited to first-time buyers?
No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers.
Can I finance the Upfront Mortgage Insurance into my mortgage?
Yes, the USDA will let you finance your Upfront Mortgage Insurance payment into your loan size. For example, if you bought a home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $2,000. You could then raise your loan size to $102,000.
My lender doesn't offer USDA mortgages. What do I do?
The U.S. Department of Agriculture website maintains a list of lenders in the Rural Housing Program. Visit its website to search for a lender, or just skip to the rate quote.
What mortgage products are available with a USDA mortgage?
Currently, the Rural Housing loan is available as a 30-year fixed rate mortgage only. Beginning in September 2014, though, a 15-year fixed rate mortgage will be available. There are no adjustable-rate mortgages.
How much are the closing costs for a USDA mortgage?
Closing costs vary by lender and location. For example, some lenders have high origination charges. Others do not. The same is true for state and local governments. Some states have high costs, others have low costs.
I can't afford closing costs. Can I get a gift for my closing costs?
Yes, USDA loans allow gifts from family members and non-family members. You will need a gift letter to accompany your loan application. Your loan officer can give you one. If you don't have a loan officer, get today's rates here.
I negotiated to have the seller pay my closing costs. Is that allowed?
Yes, the USDA Rural Housing Program allows sellers to pay closing costs for buyers. These costs can include state and local government fees, lender costs, title charges, and any number of home and pest inspections.
Can I use the USDA loan program for a vacation home?
No, the USDA Rural Housing Program is for primary residences only.
Can I use the USDA loan program for an investment property?
No, the USDA Rural Housing Program is for primary residences only.
Is there a minimum credit score for the USDA loan program?
There is no minimum score, per se, but 640 is generally regarded as a cutoff point. If your FICO is below 640, you should be prepared to explain why your credit score is below 640, and provide documentation. If you are without a credit score, your lender may accept "alternate" tradelines to establish credit history.
I recently went back to work. How long until I am USDA-eligible?
If you are a W-2 employee, you are eligible for USDA financing immediately; you don't need a job history. If you have less than 2 years in a job, however, you may not be able to use your bonus income for qualification purposes.
I am self-employed. Can I use the USDA loan program?
Yes, self-employed persons can use the USDA Rural Housing Program. If you are self-employed and want to use USDA financing, as with FHA and conventional financing, you will be asked to provide 2 years of federal tax returns to verify your self-employment income.
Can I do a "cash out" refinance with the USDA program?
No, the USDA Rural Housing Program is for purchases and rate-and-term refinances only.
Can I use the USDA loan program for my working farm?
No, the Rural Housing Program is for residential property.
Are USDA mortgage rates good?
Yes, USDA Rural Housing Program mortgage rates are often lower than comparable conventional 30-year fixed mortgage rates. And because mortgage insurance rates are lower, with a small downpayment, U.S. Department of Agriculture loans can often be a better deal as compared to FHA or conventional loans.
When mortgage rates fall, can I refinance my USDA mortgage?
Yes, USDA loans are eligible for refinance. The USDA Streamline Refinance Program waives income and credit verification so closings can happen quickly. Home appraisals aren't required, either.
Apply For USDA / Rural Housing Mortgage Here
This list is not meant to be a comprehensive of what the U.S. Department of Agriculture allows with a home loan, but it covers a lot of good ground. For more information, talk to your lender, or start with a mortgage rate quote online.
This USDA / Rural Housing loan information is accurate as of today, April 23, 2014. If you get your USDA home loan information elsewhere, double-check the publish date of the article to make sure that it's current.