First-Time Home Buyers Guide: What Is A USDA Mortgage?
USDA Mortgages Offer 100% Financing
When you’re buying a home, either as a first-time home buyer or a seasoned one, coming up with funds for down payment can be a point of stress.
It doesn’t have to be, however.
Today’s home buyers have a wide selection of low- and no-down payment mortgages from which to choose.
Among the most-overlooked small down payment mortgage is the USDA loan, which allows for 100% financing and zero money down.
Formally known as a Section 502 loan, the USDA loan is a government-insured mortgage meant to encourage homeownership in less dense parts of the country. The “less dense” description encompasses rural areas nationwide, and includes a large grouping of suburban neighborhoods, too.
97% of the United States is USDA loan-eligible, which means that there’s an excellent chance the home you’re buying will qualify under the program.
You don’t have to live in a rural area in order to use the USDA mortgage.Verify your USDA loan eligibility (Jan 16th, 2019)
The Benefits Of The USDA Mortgage Loan
The USDA mortgage is popular among first-time home buyers nationwide — or, at least, among buyers who know the program exists.
USDA loans offer 100% financing, reduced mortgage rates, and a smaller mortgage insurance payment than you’d make via other, comparable low-downpayment loans.
Let’s look at each of the benefits separately.
First, via the USDA home loan program, you can buy a home with no down payment whatsoever. The USDA loan is only one of two mortgage programs which allows for no money down loans.
The other is the VA mortgage, available to military borrowers only.
As a USDA mortgage borrower, you don’t have to borrow 100% of the home purchase, but you can. Your down payment can be as large or as small you want.
Second, home buyers using the USDA mortgage program get access to lower mortgage rates than the general population.
USDA mortgage rates are often the most aggressive of today's mortgage rates, and can be as much as 40 basis points (0.40%) below the rates for a comparable conventional mortgage.
Third, because USDA mortgages are guaranteed by the U.S. Department of Agriculture, they offer reduced mortgage rates as compared to other low-downpayment loans.
The mortgage insurance rates on a 30-year fixed-rate USDA loan are less than half of what you’ll see with FHA mortgage insurance”]; and can be as much as two-thirds less than the private mortgage insurance rates with a conventional mortgage.
Together, this means that USDA loans are cheaper than its competition, and require less money down.Verify your USDA loan eligibility (Jan 16th, 2019)
Qualifying For The 100% USDA Mortgage
To qualify for a USDA mortgage, a home buyer will follow the same approval steps as with any other mortgage loan type.
For example, income will be verified using W-2s, pay stubs, and (sometimes) federal income tax returns; savings will be verified using bank statements and investment account reports; and, monthly debts will be verified using the information pulled from a recent credit report.
Proof of employment and citizenship are verified as well.
Beyond these basics, though, which are required with all purchase home loans, the 100% USDA mortgage program requires several additional verifications.
The first additional verification is linked the property, itself.
USDA mortgages are only available in areas of low-density of population. This means that you cannot use the USDA mortgage to purchase a condominium in a city. However, you can use the program in areas considered rural, and throughout many U.S. suburban neighborhoods.
97% of the United States is USDA-eligible via the “density standard”.
The second additional verification is linked to household income.
The USDA mortgage program is meant for households of modest income only, and the USDA varies its definition of “modest income” by U.S. county and size of household.
Here is an example of how the USDA income limits vary by location and size of household:
- Modest income for 2-person household in Cincinnati, OH: $82,000
- Modest income for 5-person household in Los Angeles, CA: $129,600
You can use this USDA Income Limit Lookup to check your household eligibility.
And, lastly, the USDA will verify that home you’re about to purchase will be a primary residence for you; and that the home is a single-family residence (i.e. not a multi-unit home or a condominium).
USDA loans cannot be used for second homes, vacation properties, or for rentals. You must live in the home you’re purchasing and financing.Verify your USDA loan eligibility (Jan 16th, 2019)
Help! My Lender Doesn’t Offer USDA Mortgages!
USDA loan are government-backed and widely-available for first-time and seasoned buyers of homes. However, not every bank will offer USDA loans to its customers.
This is because the USDA loan is a relative newcomer as compared to its cohorts.
FHA loans have been available since 1934. VA loans have been available since 1944. Conventional loans have been available since 1970.
USDA loans, by contrast, were only made available beginning in 1994; and, for the first number of years, their use was strictly limited to rural areas.
Then, during the period in which the USDA loan footprint was expanded to include suburban areas nationwide, getting access to a 100% mortgage wasn’t so unique — no money down loans were available everywhere.
Only recently, with the maturation of the USDA home loan program and the shift in U.S. mortgage lending, have banks begun to add the USDA loan to their menus.
If your current bank doesn’t offer the 100% USDA mortgage, your best bet may be to try with smeone else. There are a large number of USDA-approved lenders nationwide. Getting access to one should be simple.
What Are Today’s Mortgage Rates?
First-time home buyers have access to wide number of low- and no-downpayment mortgage loans. The 100% USDA loan is one of the most aggressive.Verify your USDA loan eligibility (Jan 16th, 2019)