What is a USDA Loan? Eligibility, rates & downsides for 2018
What is a USDA loan?
A USDA home loan is a 100% financing (zero down payment) mortgage offered by the U.S Department of Agriculture to home buyers in less densely populated areas of the country. Eligibility is determined by home location, income level, and other requirements.
In this article:
How USDA home loans work: The USDA loan process is like that of any other mortgage.
USDA advantages: Comparing loan types, and who might not choose a USDA mortgage.
USDA loan eligibility: Who qualifies for USDA loans -- income, down payment, credit scores, and more.
The USDA loan program
The USDA home loan program is one of the best-kept secrets in the home buying market today.
This zero-down, 100% financing home loan is sponsored by the United States Department of Agriculture to promote homeownership in less-dense communities across the U.S.
For this reason, it’s often known as the USDA Rural Development Loan (RD Loan) or Rural Housing Loan. The program is part of the larger Rural Housing Service under USDA's umbrella of programs.
But don’t let the name fool you. It’s not just for properties that are far-removed from civilization.
In fact, a full 97% of U.S. land mass is eligible for USDA financing, representing 109 million people -- about one-third of the U.S. population. It's very likely that a property near you qualifies.Verify your USDA loan program eligibility (Mar 21st, 2018)
Getting a USDA loan program is not much different than getting an FHA loan or a conventional mortgage.
Like FHA, a government agency sponsors the program, but local lenders handle 100% of the transaction. That means your lender does everything from taking your application to issuing the final approval. USDA puts a final stamp of approval on the loan, and even that is handled by the lender. Here’s how the USDA home loan process looks:
Apply → Get Preapproved → Find a House → Full Lender Approval → Final Signoff by USDA → Close the Loan → Move in
Apply: Chances are you can find a lender that offers USDA financing in your town or city. Most lenders in the U.S. can approve USDA home loans.
Get preapproved: Your lender will look at your income, credit, and employment information. If you meet USDA home loan requirements, you will receive a preapproval letter.
Find a house: Use your preapproval letter to make an offer on a USDA-eligible home. Make sure the house is in a designated USDA area before making an offer.
Full lender approval: The lender adds property information to your loan file, and does one last check.
Final Signoff by USDA: The lender submits your full loan file to USDA for its seal of approval.
Close the loan: You sign final paperwork. A few days later, the house is yours.
Move in: You successfully completed your mortgage process. Now, enjoy your home.Verify your USDA loan program eligibility (Mar 21st, 2018)
USDA home loan down payment
The down payment requirement -- or lack thereof -- is why so many buyers choose the USDA loan program. No down payment is required, making it one of the few 100% financing home loans available in today’s market.
The only other widely available zero-down loan is the VA mortgage, eligibility for which is gained by adequate military service.
For civilians, USDA loans are likely the only no-down mortgage option. Following are minimum down payment requirements for all major loan types.
- Conventional loans: 3% down
- FHA: 3.5% down
- VA: 0% down
- USDA: 0% down
Down payment advantage: It would take years for many families to save 3% down or more. During that time, home prices can go up, making saving a down payment even harder. With USDA, home buyers can purchase immediately and take advantage of increasing home values.
USDA guaranteed loans aren’t right for every buyer. But, any first-time or repeat buyer looking for homes outside of major cities should check their eligibility for the program.
Here are a few advantages:
- Lower down payment than conventional or FHA financing
- Lower mortgage insurance than conventional or FHA loans
- More lenient credit score requirements than for conventional loans
- Unlike VA loans, there is no military service requirement
- The only zero-down loan on the market besides the VA mortgage
When USDA is not the right choice: If you want to buy a home close to the downtown core of a major city, USDA is not right for you. Additionally, if you have a high income for your area, or 20% down available, you will not qualify for USDA. This loan is reserved for those who need it most.
There are two main factors for USDA home loan eligibility: the property and the home buyer.Verify your USDA loan program eligibility (Mar 21st, 2018)
1. USDA property eligibility
Geographic areas for USDA loans: The home must be located within a USDA-eligible area. The USDA website contains interactive maps with which you can pinpoint an address or take a wider view of a region.
Definition of a rural area: To be eligible, a home must be in a rural area. But you might be surprised at what is considered rural. Generally, cities and towns with a population less than 20,000 qualify, but bigger cities are eligible if they are “rural in character” or don’t have good access to mortgage credit.
Plus, property eligibility maps haven’t been significantly updated in more than 15 years. Many surprisingly populous areas across the U.S. qualify. What was once considered a rural area might now be a significant population center.
Property standards: Your lender will order an appraisal on the property which will ensure it is worth what you’re paying. The appraisal report also verifies the home is livable, safe, and meets USDA’s minimum property requirements. Any safety or livability issues will need to be corrected before loan closing.
Property types: Contrary to popular belief, USDA loans are not meant to finance farms or large acreage properties. Rather, they are geared toward the standard single-family home. You can also finance some condominiums and townhomes with the program.
Occupancy: The home you are buying must be your primary residence, meaning you plan to live there for the foreseeable future. Rental properties, investment properties, and second home purchases are not eligible for the USDA loan program.
USDA home loan map: USDA home loans are available in many suburban areas around the country, often just outside major metropolitan areas. Below are screenshots showing USDA eligible locations (everything except the tan areas).
Dallas-Fort Worth area:
Portland, Oregon area:
Images source: USDA website
2. USDA buyer eligibility
The lender will verify USDA rural development loan eligibility in the same way as for any other home loan program. Your credit, income, and bank account information will be compared to current guidelines for USDA loans.
First-time home buyer: You do not need to be a first-time home buyer. However, you may not own an adequate, livable property reasonably close to where you are buying.
USDA income limits: USDA requires an income of 115% or less of your region’s median income. For instance, if your area median income is $50,000, you could make up to $57,500 and still qualify.
Increased limits are available to families of five or more. Check your area’s income limits here.
Keep in mind that the USDA lender will count your entire household income toward limits. For instance, if you have a working teenage son, the lender would factor his income into household income totals, even if he is not on the loan.
Loan limits: There are no stated mortgage limits for USDA loans. Rather, the applicant’s income determines the maximum loan size. The USDA income limits, then, ensure reasonable loan sizes for the program.
Asset limits: If you have 20% down, you may not use USDA financing. According to USDA guidelines, this loan is reserved for those who can't qualify for other mortgage types, such as conventional loans.
Employment: You typically need a 24-month history of dependable employment to qualify, plus adequate income from said employment. However, schooling in a related field can replace some or all of that experience requirement.
USDA loan debt-to-income ratio (DTI): Current DTI limits are set at 29/41. The definition of debt-to-income ratio is the comparison between your monthly debt payments compared to your gross income.That means 29% of your pre-tax income can go toward the principal, interest, taxes, insurance, and HOA dues on the home you plan to buy. A total of 41% of your income can be used for your proposed house payment plus all other debt.
For USDA, 29% of your pre-tax income can go toward the principal, interest, taxes, insurance, and HOA dues on the home you plan to buy. A total of 41% of your income can be used for your proposed house payment plus all other debt.
For instance, if you make $5,000 per month, your house payment can be up to $1,450 and all other debt payments (auto loans, student loans, credit cards, etc.) can equal $600.
To sum it up, for every $1,000 in income, $290 can go toward the house, and $120 toward other debts.
Citizenship: You must be a U.S. citizen or have permanent resident status, be a non-citizen national or qualified alien to qualify for the USDA program. Valid evidence of residency status will be required.
Direct loan vs guaranteed loan: USDA offers two types of loans: direct and guaranteed. Guaranteed loans are offered by private lenders and backed by USDA. Direct loans have more stringent requirements, like very low income limits. USDA offices issue these loans directly to consumers.
USDA mortgage rates
USDA loan rates are some of the lowest on the market. You might be thinking that you’ll pay high rates for a zero-down loan that accepts low credit scores. But, due to strong government backing, rates are low.
USDA’s mandate is to promote homeownership in non-urban areas. As such, it makes its loan affordable to a wider spectrum of home buyers by keeping rates and fees low.
You will probably end up paying less for a zero-down USDA home loan compared to a 3% to 5% down conventional loan.
Credit score requirements
You don’t need a high FICO score to qualify for USDA loans, and technically, there’s no minimum.
Borrowers with a credit score of 640 and higher can receive a streamlined approval. If your score is below 640, or you have no score at all, your lender will request extra documentation to determine approval status. Documentation may include:
- Rental history
- Utility payment history
- Insurance payments
- Childcare provider payment history
- Tuition payments
In some cases, the lender can package up these documents and request a credit score from a credit rating agency. With good payment history, the agency can generate your score, allowing a more streamlined USDA rural housing approval.
The lender might need extra documentation if you have experienced a bankruptcy, have any accounts in collection, or have other credit history “dings” on your report. This applies even if your credit score is above 640.
USDA mortgage fees for 2018
The USDA mortgage borrowers will pay very low fees compared to what they would pay for other low down payment loans.
Mortgage insurance: It requires an upfront fee of 1.0% of the loan amount, and a mortgage insurance fee equal to 0.35% of the loan balance per year.
For a $200,000 loan, that’s $2,000 upfront and $58 per month.
That’s a big discount compared to the FHA Mortgage Insurance Premium, or MIP. An FHA mortgage loan would require $3,500 upfront and $141 per month for the same loan. (Another big advantage: FHA requires 3.5% down, and USDA requires no down payment).
USDA mortgage insurance is also probably about half as expensive as private mortgage insurance, or PMI, for a conventional / conforming loan offered by Fannie Mae and Freddie Mac.
The USDA upfront fee can be rolled into the loan amount and does not have to be paid in cash.
USDA closing costs: They do not require additional closing costs above what you would pay for other loan types. In fact, you can pay for 100% of your closing costs with a financial gift from a family member, approved non-profit, or via a seller concession.
A seller concession is also known as a seller credit, which is a sum of money given from seller to buyer to help pay closing costs. Typically, the seller can contribute the full amount of closing costs. This helps buyers bring little or nothing in cash to the closing table.
In general, USDA closing costs are around 1-3% of your loan amount, and include items such as:
- Lender’s fees
- Title insurance
- Escrow fees
- County recording
Again, these are all fees that you would pay for any type of loan.
Loan Terms: Available in 30-year and 15-year fixed rate mortgage options. Fixed rates are the most time-tested and safe for home buyers, therefore adjustable-rate loans are not available.
USDA guarantee: The name -- USDA guarantee loan -- does not mean mortgage approval for all applicants is certain. It means that the United States Department of Agriculture backs the lender for properties in designated rural areas. If the borrower can’t pay for some reason, USDA will reimburse the lender monies lost. This insurance helps lenders approve loans with zero down at very low mortgage rates: the guarantee removes much of the risk.
Affordability: One of the most affordable mortgage products available today. The combination of low rates, low mortgage insurance fees, and zero down makes it the most widely-available ultra-affordable loan.
USDA refinance: You can use USDA to refinance if you have a USDA mortgage currently. In fact, you might not even need to provide current income documentation or an appraisal. Read more about USDA refinancing here.
How to check your USDA eligibility and get started
Lenders across the U.S. offer USDA financing. Here at The Mortgage Reports, we specialize in matching applicants with the right lender. Check your eligibility to get started.Verify your USDA loan program eligibility (Mar 21st, 2018)
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