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What is a USDA home loan?
USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program.
USDA loans are available to home buyers with low-to-average income. They offer financing with no down payment, reduced mortgage insurance, and below-market mortgage rates.
You can use a USDA mortgage to buy a home or refinance one you already own at a low rate. In short, USDA home loans are putting people in homes who never thought they could do anything but rent.
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>Related: How to buy a house with $0 down: First-time home buyer
USDA loan requirements
USDA loan requirements are based on the buyer and the property.
First, the home must be in an eligible rural area, which USDA typically defines as a population of less than 20,000.
Second, the buyer must meet USDA monthly income caps. To be eligible, you can’t make more than 15% above the local median income. You also have to use the home as your primary residence (no vacation homes or investment properties allowed).
Finally, borrowers have to meet the lender’s basic financial requirements, including:
- Income eligibility: Steady job and monthly income, proven by tax returns
- Credit requirements: FICO credit score of at least 640 (though this can vary by lender)
- Existing debt ratio: Debt-to-income ratio of 41% or less in most cases
To find out if the property you’re buying is a USDA eligible rural area and if you meet local income limits, you can use the USDA’s eligibility maps.
USDA loan rates: How do they compare to FHA & conventional?
Compared to other home loan programs, USDA mortgage interest rates are some of the lowest available.
USDA rates are typically only matched by the VA loan, which is exclusively for veterans. These two programs — USDA and VA — can offer below-market interest rates because their government guarantee protects lenders against loss.
Other mortgage programs, like the FHA loan and conventional loan, can have rates around 0.5%-0.75% higher than USDA rates on average.
That said, mortgage rates are personal. Getting a USDA loan doesn’t necessarily mean your rate will be “below-market” or match USDA loan rates advertised.
To get the lowest possible rate and monthly payments, you need an excellent credit score and a low debt-to-income ratio. Making a bigger down payment helps, too.
You also need to shop around with a few different USDA mortgage lenders.
Each USDA lender sets rates differently — so comparing personalized rates from more than one company is the only way to find your lowest option.
How USDA loans work
Using a USDA loan, buyers can finance 100% of a home purchase price while getting access to better-than-average mortgage rates. This is because USDA mortgage rates are discounted as compared to other low-down payment loans.
Beyond that, USDA loans aren’t all that different from other home loan programs.
The repayment schedule doesn’t feature a “balloon” or anything non-standard; the closing costs are ordinary; and, prepayment penalties never apply.
The two areas where USDA loans are different is with respect to the loan type and down payment amount.
- With a USDA loan, you don’t have to make a down payment. This is one of only two major loan programs that allow zero-down financing
- The USDA loan program requires you to take a fixed-rate loan. Adjustable-rate mortgages are not available via the USDA rural loan program
Rural loans can be used by first-time home buyers and repeat home buyers alike. Homeowner counseling is not required to use the USDA program.
USDA loans require mortgage insurance (MI)
USDA guarantees its mortgage loans, meaning it offers protection to mortgage lenders in case USDA borrowers default. But the program is partially self-funded.
To keep this loan program running, the USDA charges homeowner-paid mortgage insurance premiums.
As of October 1, 2016, USDA has lowered its mortgage insurance costs for both the upfront and annual guarantee fees.
The current USDA mortgage insurance rates are:
- For purchases: 1.00% upfront guarantee fee, based on the loan amount
- For refinancing: 1.00% upfront guarantee fee, based on the loan amount
- For all loans: 0.35% annual guarantee fee, based on the remaining principal balance each year
As a real-life example: A home buyer with a $100,000 loan size would have a $1,000 upfront mortgage insurance cost, plus a monthly payment of $29.17 for the annual mortgage insurance.
USDA upfront mortgage insurance is not paid as cash. It’s added to your loan balance for you, so you pay it over time.
USDA mortgage insurance rates are lower than those for conventional or FHA loans.
- FHA mortgage insurance premiums include a 1.75% upfront mortgage insurance premium, and 0.85% in MIP annually
- Conventional loan private mortgage insurance (PMI) premiums vary based on your DTI, credit scores, and additional factors, but they can can reach above 1% annually
With USDA-guaranteed loans, mortgage insurance premiums are just a fraction of what you’d typically pay. Even better, USDA mortgage rates are low.
USDA mortgage rates are often the lowest among FHA mortgage rates, VA mortgage rates, and conventional loan mortgage rates — especially when buyers are making a small or minimum down payment.
For a buyer with an average credit score, USDA mortgage rates can be 100 basis points (1.00%) or more below the rates of a comparable conventional loan.
Lower rates mean lower mortgage payments each month, which is why USDA loans can be extremely affordable.
About the USDA Rural Housing Mortgage
The Rural Development loan’s full name is the USDA Single Family Housing Guaranteed Loan Program. However, the program is more commonly known as a USDA loan.
The Rural Development loan is sometimes called a “Section 502” loan, which refers to section 502(h) of the Housing Act of 1949, which makes the program possible.
This program is designed to help single-family home buyers and stimulate growth in less-populated, “rural,” and low-income areas.
That might sound restrictive. But in fact, 97% of the U.S. map is eligible for USDA loans, including many suburban areas near major cities. Any area with a population of 20,000 or less (or 35,000 or less in special cases) can be an eligible rural area.
Yet most U.S. home buyers, even those who have USDA loan eligibility, haven’t heard of this program or know little about it.
This is because the USDA loan program wasn’t launched until the 1990s. Only recently has it been updated and adjusted to appeal to rural and suburban buyers nationwide.
Many USDA-approved lenders don’t even list the USDA loan on their loan application menu. But many offer it.
So if you think you’re eligible for a zero-down USDA loan, it’s worth asking your shortlist of lenders whether they offer this program.
USDA home loan FAQ
What is a USDA loan?
USDA loans are special mortgages meant for low- to moderate-income home buyers. These loans are guaranteed by the United States Department of Agriculture. That guarantee acts as a form of insurance protecting USDA lenders, so they’re able to offer below-market interest rates and zero-down home loans. USDA runs this program to encourage homeownership for low-income families and economic development in rural areas.
How do you qualify for a USDA loan?
You might qualify for a USDA loan if you have an average salary for your area and a credit score of 640 or higher. USDA loans can be used to buy a home only in a rural or suburban area. Typically, qualifying areas have a population under 20,000.
What is the income limit for USDA home loans?
The income limit for USDA home loans is based on your area’s median income. To be eligible for a USDA loan, you can’t exceed the median income by more than 15%. For example, if the median salary in your city is $65,000 per year, you could qualify for a USDA loan with a salary of $74,750 or less. (15% of $65,000 = $9,750 → $65,000 + $9,750 = $74,750).
Is a USDA loan good?
A USDA loan is a great option for buyers with moderate or low income. It lets you buy a house with nothing down and low mortgage rates — two huge benefits that only one other loan program (the VA loan) offers. If your home is in an eligible area, it’s worth exploring a USDA-guaranteed loan. The main drawback is that USDA loans require mortgage insurance for the life of the loan. So if you can make a 20% down payment, you might prefer a conventional loan with no mortgage insurance payment.
Is USDA better than FHA?
Both programs let you buy with a low down payment and require mortgage insurance. USDA can be used with zero down, but the home has to be in a qualified rural area, and the buyer has to meet income eligibility caps. FHA requires 3.5% down, but there are no location or income restrictions. FHA also has more lenient credit requirements: You need a 580 credit score for FHA versus 640 for USDA). The right loan type for you depends on where you’re buying and your financial situation.
How does the USDA loan work?
USDA loans are not direct loans from the government. But they are backed by the U.S. Department of Agriculture, so they can offer down payment assistance and low rates. Aside from that, USDA loans work like other mortgages. They’re offered by mainstream lenders so you can apply online, in person, or over the phone. And you still have to get pre-approved and qualify for a USDA loan based on your income, credit, debt, and other factors. One other difference is that the lender has to send the loan file to USDA to be approved before underwriting. This can add around two to three weeks to your loan processing time.
Is there a minimum credit score for the USDA loan program?
On December 1, 2014, USDA implemented a minimum score of 640. Before that date, USDA set no minimum score for the program. However, most lenders did. When USDA implemented an official credit score minimum, it did not exclude very many additional buyers. If you are without a credit score, your lender may accept “alternate” tradelines to establish a credit history. (For instance, on-time rent and utility payments that wouldn’t typically be included in a credit report.)
What is the USDA program’s minimum down payment?
The USDA has no down payment requirement. You can finance 100% of the home price with a USDA loan. However, if you do decide to make a down payment, you can lower your monthly mortgage payments and potentially afford a more expensive home.
Are USDA mortgage rates good?
USDA loan rates are often lower than conventional 30-year fixed mortgage rates. Plus, mortgage insurance rates are lower. This means a USDA loan is often more affordable overall than a comparable FHA or conventional loan.
When mortgage rates fall, can I refinance my USDA mortgage?
Yes, USDA loans are eligible for refinance into another USDA loan or a conforming conventional loan. The USDA Streamline Refinance Program waives income and credit verification so closings can happen quickly. Home appraisals aren’t required, either.
Can I do a cash-out refinance with the USDA program?
No, the USDA Rural Housing Program is for home buying and rate-and-term refinances only.
Why does the USDA offer the Rural Development loan?
The USDA Rural Development loan is meant to help moderate to low-income families get access to housing and mortgage loans in some of the less densely populated parts of the country. By enabling homeownership, the USDA helps create stable communities for households of all sizes.
What areas are eligible for a USDA loan?
With the USDA Rural Housing Program, your home must be located in a rural area. However, the USDA’s definition of “rural” is liberal. Many small towns meet the “rural” requirements of the agency, as do suburbs and exurbs of many major U.S. cities. About 97% of the United States landmass fits the USDA loan’s definition of “rural.” Only 3% is ineligible at the time of writing this article.
How can I find if my area is USDA-eligible?
The website of the U.S. Department of Agriculture lists eligible USDA communities by Census tract. You are required to provide a home’s exact address. The website will show whether that home meets program guidelines.
Is there mortgage insurance (MI) on a USDA loan?
USDA loans require mortgage insurance (MI) to be paid. This includes a 1.00% upfront guarantee fee, which is added to your loan balance at closing, and an annual fee of 0.35%, which is broken into 12 installments and added to your monthly mortgage payments.
Can I finance the Upfront Mortgage Insurance into my mortgage?
Yes, the USDA will let you finance your Upfront Mortgage Insurance payment by adding it to your loan amount. For example, if you bought a new home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $1,000. You could then increase your loan size to $101,000.
What’s the maximum USDA mortgage loan size?
The USDA sets no loan limits. However, the amount you can borrow is limited by your income and your household’s debt-to-income ratio. The USDA typically caps debt-to-income ratios to 41%. However, the program may be more lenient for borrowers with a credit score over 660 and stable employment, or who show a demonstrated ability to save.
Is the USDA loan program limited to first-time buyers?
No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers alike.
Where can I find a USDA loan lender?
The U.S. Department of Agriculture’s website maintains a list of approved lenders for the Rural Housing Program.
What loan terms are available through USDA?
The USDA Rural Housing loan is available as a 30-year fixed-rate mortgage only. There is no 15-year fixed option, or adjustable-rate mortgage (ARM) program available via the USDA.
How much are the closing costs for a USDA mortgage?
Closing costs vary by lender and location. For example, some lenders have high origination charges. Others do not. The same is true for state and local governments. Costs are high in some states and low in others. Because closing costs vary, be sure to shop around to find the most suitable combination of low mortgage rates and low costs.
Do I have to escrow my taxes and insurance with a USDA mortgage?
Yes, USDA mortgages require borrowers to escrow taxes and homeowners insurance with the lender. This means you’ll pay your taxes and insurance along with your mortgage each month. You may not pay your real estate taxes or annual homeowner insurance separately.
I can’t afford closing costs. Can I get a gift for my closing costs?
Yes, USDA loans allow gifts from family members and non-family members. Let your loan officer know as soon as possible that you’ll be using gifted funds, as this requires extra documentation and verification on the lender’s part.
I negotiated to have the seller pay my closing costs. Is that allowed?
Yes, the USDA Rural Housing Program allows sellers to pay closing costs for buyers. This is known as “Seller Concessions.” Seller concessions may include all or part of a purchase’s state and local government fees, lender costs, title charges, and any number of home and pest inspections.
Can I use the USDA loan for a vacation home?
No, the USDA loan cannot be used for a vacation home, it is for primary residences only.
Can I use the USDA loan for an investment property?
No, the USDA loan cannot be used for investment properties.
Can I use the USDA loan program for my working farm?
No, the Rural Housing Program is for residential property.
I recently went back to work. How long until I am USDA-eligible?
If you are a W-2 employee, you are eligible for USDA financing immediately; you don’t need a job history. If you have less than two years in a job, however, you may not be able to use your bonus income for qualification purposes.
I am self-employed. Can I use the USDA loan program?
Yes, self-employed people can use the USDA Rural Housing Program. If you are self-employed and want to use USDA financing, as with FHA and conventional financing, you will be asked to provide two years of federal tax returns to verify your self-employment income.
Can I use the USDA loan program for a new construction home?
Yes, the USDA loan program can be used for newly-built homes and other new construction.
Can I use the USDA loan program to make repairs and improvements to an existing home?
Yes, the USDA loan program can be used to make eligible repairs and improvements to a home. This may include replacing windows or appliances; preparing a site with trees, walks, and driveways; drawing fixed broadband service to the home; and, connecting water, sewer, electricity, and gas.
Can I use the USDA loan program to make a home accessible to people with physical handicaps?
Yes, the USDA loan program can be used to permanently install equipment to assist household members with physical disabilities.
Can I use the USDA loan program to make energy-efficiency improvements to a home?
Yes, the USDA loan program can be used to purchase and install materials meant to improve a home’s energy efficiency, including windows, roofing, and solar panels.
Can a non-citizen qualify for a USDA loan?
Yes, along with U.S. citizens, legal permanent residents of the United States can also apply for a USDA loan.
Does income eligibility include household income?
Yes, a borrower’s household income cannot exceed 115% of the area’s median income.
Today’s USDA mortgage rates
USDA mortgage interest rates are typically the lowest on the market (next to VA loans).
Because rates are already near record lows, many home buyers who qualify for USDA can get incredible deals right now.
To find out whether you qualify for a USDA loan — and what your rate is — check with a lender.