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 home ownership 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.
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 Pre-Approved -> Find a House -> Full Lender Approval -> Final Signoff by USDA -> Close the Loan -> Move in
Apply: Quest Home Loan Center offers USDA Loans. You can apply in person at our office or online by clicking Apply.
Get pre-approved: 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 pre-approval 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 Sign-off 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.
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, 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.
Is A USDA Loan Right For Me?
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.
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
Geographic areas for USDA loans: 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 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.
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 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'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.
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 loans debt-to-income ratio (DTI): 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.
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 home ownership 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.
You don't need a high FICO score to qualify for USDA loans, 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.
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
- County recording
Again, these are all fees that you would pay for any type of loan.