What To Know About 100% USDA Mortgage Loans

November 3, 2016 - 5 min read

100% Financing For Rural and Suburban Homes

The USDA home loan is a widely available mortgage type backed by the U.S. Department of Agriculture (USDA). Its purpose: to promote homeownership and economic development in non-metro areas.

How does it accomplish this task? By offering 100% financing to eligible home buyers in less-dense areas of the country.

Homeownership leads to stable communities, which in turn spurs economic development in these geographical pockets.

Mortgages that eliminate the main barrier to entry — a downpayment — are arguably the most important catalyst in this virtuous cycle.

Yet most home buyers don’t know much about the USDA loan, if they’ve heard of it at all.

With USDA mortgage rates in the 3s, and home prices still within affordable ranges, it’s time for buyers to look closely at the USDA home loan program.

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USDA Loan : Not Just A Small-Town Mortgage

The USDA loan probably has more names than any other loan type. But all the following titles point to the same mortgage program.

  • Rural Development (RD) Loan
  • USDA Home Loan
  • Section 502 Loan
  • Single-Family Housing Guaranteed Loan Program

Don’t take the names at face value.

This is not an obscure loan type only available in extra-remote areas, and only available directly from the government.

Quite the opposite.

A full 97% of U.S. land mass is eligible for USDA financing, much of which is just outside major metro areas.

Suburban neighborhoods across the country are dotted with USDA homeowners who discovered that their desired community was eligible.

Home loan applicants are also surprised that these loans are available from a variety of lenders across the country. It’s often served alongside FHA home loans and VA loans as part of a lender’s list of government-backed loan options.

It always pays to check with your lender about a few things: 1) whether your desired home lies within USDA geographic eligible zones, and 2) if you qualify for the program.

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100% Financing : Fast-Track To Home Buying

The primary struggle for many home buyers is raising funds for the downpayment.

Home prices are on the rise. Sometimes, saving for a downpayment is counter-productive: if it takes a year to save up a 5% downpayment, home prices could easily rise 5% during that year.

A zero-down home loan can enable a buyer to purchase a home now, instead of a year from now; buying at today’s prices saves the struggle of saving for a downpayment, which would only go toward the increased home price anyway.

The USDA loan is one of only two loans that offer 100% financing as a standard guideline. The VA loan is the other zero-down mortgage, and it is only available to those with eligible military experience.

The can be made into a 100% financing home loan, with the help of some extra resources. You can get a financial gift to fulfill the FHA-required 3.5% downpayment. Or, you might find down-payment assistance options that can help with the downpayment.

The USDA loan stands alone in its ability to completely finance the typical home buyer’s purchase without the extra — and sometimes complicated — process of saving for a downpayment or getting financial help with one.

Additional USDA Home Loan Benefits

Full financing of a home purchase is this program’s most notable benefit. But that’s not where the advantages end. The following USDA loan attributes are helping renters become buyers, too.

  • Low USDA mortgage rates
  • Small mortgage insurance costs compared to FHA
  • Reduced mortgage insurance became effective in October 2016
  • Lenient credit score requirements
  • Closing costs that can be seller-paid or gift-funded

Many home buyers assume there’s a catch or a “gotcha” included with these benefits. There’s not. But the loan program is reserved to those who need it most.
Outside of the geographic restrictions, USDA home loans also have income restrictions — you can’t make too much.

The income limits are set by the median income within each geographical area, and also by family size.

The maximums are quite generous, as demonstrated by the below example limits based on a family size between one and four persons.

  • Fresno, California: $75,650 annually
  • Miami, Florida: $91,050 annually
  • Richmond, Virginia: $79,800 annually
  • Bremerton, Washington: $86,950 annually

Families of five or more members are eligible with even higher incomes, and families with income just over the limits may be eligible for income deductions based on USDA guidelines.

USDA loan advantages should encourage home buyers to check with their lender, even if they think they are not eligible due to geographic or income restrictions.

They could find that they are perfectly suited for this 100% financing home loan program.

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USDA Home Loans: Do I Qualify?

USDA loans are easier to qualify for than other loan programs that require a high downpayment.

Most borrowers with at least okay credit and a stable source of income should qualify. Here are the specific approval requirements.

Credit history

Applicants must indicate ability and willingness to meet obligations. This ability is usually determined by past credit history. Lenders want to see a credit profile that shows mostly on-time payments across various credit accounts.

USDA credit score minimum

Applicants need a credit score minimum of 640 to qualify, although a few lenders will allow lower scores. Home buyers who are just a few points below should consider a rapid rescore to rise above the typical minimum threshold.

Besides the score itself, USDA lenders like 12 months of clean credit prior to your mortgage application including proof of on-time rent payments over the past year.

USDA income requirements

USDA applicants must make enough to comfortably make the mortgage payment each month. Lenders determine comfort level via a ratio of your income compared to debt payments.

The stated maximum is 41 percent of income allocated to the future home payment plus any other debt payment such as auto loans and credit cards.

For instance, a home buyer making $4,000 per month can qualify with total payments up to $1,640 per month.

Applicants can qualify with an even higher ratio, however, with compensating factors such as a high credit score and a rent payment that matches the proposed house payment.

Job history

Lenders prefer a two year history of documentable income and employment, but can make exceptions for new college graduates. A degree in a field related to the applicant’s line of work can be counted as adequate work history.

USDA property guidelines

USDA home loans are for home in which the applicants plan to live. However, you do not have to be a first time home buyer, as long as you own no other adequate housing a reasonable distance from the area in which you are buying. The property must be in a solid, livable condition with no major defects.

USDA home loans are not difficult to qualify for, and most lenders in suburban and rural areas offer them.

If your lender does not a USDA-approved source, consider finding a lender that is. It’s worth, at the minimum, getting a rate quote and home payment estimate from the USDA lender.

What Are Today’s USDA Rates?

Mortgage rates in general are low. USDA rates are even lower than averages typically stated in major news sources.

Get a USDA rate quote for your upcoming home purchase. There’s no obligation to continue if you decide it’s not the right time. Check your USDA eligibility and you could be a homeowner sooner than you thought possible.

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Shashank Shekhar
Authored By: Shashank Shekhar
The Mortgage Reports contributor
Shashank Shekhar is a mortgage broker/lender with 10+ years experience, licensed in the states of CA, WA and TX. NMLS ID 8176.