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Posted 01/18/2017

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What is a USDA Loan? Eligibility, Rates & Downsides [May 2017]


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 loan.

USDA loan eligibility: Who qualifies for a USDA loan -- income, down payment, credit scores, and more.


What Is A USDA Loan?

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 Rural Development Loan (RD Loan) or Rural Housing Loan. 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.

Click to see your USDA loan eligibility (May 26th, 2017)

How Do USDA Loans Work?

Getting a USDA loan 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, from taking your application to issuing the final approval. USDA only puts a final stamp of approval on the loan, and even that is handled by the lender. Here’s how the process looks:

Apply → Get Preapproved → Find a House → Full Lender Approval → Final Signoff by USDA → Close the Loan → Move in

Apply: You can find a lender that offers USDA financing at this link. Most lenders in the U.S. can approve USDA loans.

Get preapproved: Your lender will look at your income, credit, and employment information. If you qualify, 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 USDA loan. Now, enjoy your home.

Click to see your USDA loan eligibility (May 26th, 2017)

USDA Home Loan Down Payment

The down payment requirement -- or lack thereof -- is why so many buyers choose USDA. 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, the USDA loan is 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.

Is A USDA Loan Right For Me?

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.

Click to see your USDA loan eligibility (May 26th, 2017)

Am I Eligible For A USDA Home Loan?

There are two main eligibility factors for USDA mortgage loans: the property and the home buyer.

1. USDA property eligibility

USDA-eligible geographic areas: The home must be located within a USDA-eligible area. The agency publishes interactive maps with which you can pinpoint an address or take a wider view of a region.

Definition of rural: 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.

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.

2. USDA buyer eligibility

The lender will verify USDA rural development loan eligibility in the same way as for any other home loan. Your credit, income, and bank account information will be compared to current USDA loan requirements (guidelines).

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’s 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.

Loan limits: There are no stated loan 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 loan 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 debt-to-income (DTI) maximum: Current DTI limits are set at 29/41. 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 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.

Click to see your USDA loan eligibility (May 26th, 2017)

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 loan compared to a 3% to 5% down conventional loan.

Credit Requirements

You don’t need a high FICO score to qualify for a USDA loan, and technically, there’s no minimum.

Borrowers with a 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

The lender might need extra documentation if you have experienced a bankruptcy, have any accounts in collection, or have other credit “dings” on your report. This applies even if your credit score is above 640.

Click to see your USDA loan eligibility (May 26th, 2017)

USDA Mortgage Fees For 2017

The USDA mortgage comes with very low fees compared to 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 loan would require $3,500 upfront and $141 per month for the same loan.

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 or approved non-profit.

In general, expect to pay around 1-3% of your loan amount in closing costs, which includes items such as:

  • Lender’s fees
  • Title insurance
  • Escrow fees
  • Appraisal
  • County recording

Again, these are all fees that you would pay for any type of loan.

More Details

Loan Terms:  Available in 30-year and 15-year fixed rate options. Fixed rates are the most time-tested and safe for home buyers, therefore adjustable-rate loans are not available.

USDA guarantee: The USDA “guarantee” does not mean approval for all applicants is certain. It means that USDA backs the lender. 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.

USDA 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. Click the link below to get started.

Click to see your USDA loan eligibility (May 26th, 2017)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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2017 Conforming, FHA, & VA Loan Limits

Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)