USDA Home Loans

USDA Loans

USDA loans are mortgages backed by the United States 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 for their area. These loans offer 100% financing with reduced mortgage insurance premiums, and they feature below-market mortgage rates.  USDA home loans put people who never thought they could do anything but rent into their own homes.

How USDA Loans Work

Using a USDA loan, buyers can finance 100 percent of a home’s 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. 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 Loan Requirements

USDA eligibility is based on the buyer and the property.  First, the home must be in a qualified “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).

Borrowers also have to meet USDA’s “ability to repay” standards, 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 USDA eligible, you can use the USDA’s eligibility maps.

Mortgage Insurance (MI) Required

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 monthly fees.

The current USDA mortgage insurance rates are:

• For purchases — 1.00% upfront fee, based on the loan amount
• For refinancing — 1.00% upfront fee, based on the loan amount
• For all loans — 0.35% annual fee, based on the remaining principal balance each year

As a real-life example: A home buyer with a $100,000 loan size would be 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, but can often be 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.