What’s a USDA home loan?

USDA loans are mortgages backed by the USDA as part of its Rural Development Guaranteed Housing Loan program. USDA loans are available to people who have a low-to-average income in their region. They include financing with no down payment, reduced mortgage insurance, and lower mortgage rates than the average. USDA home loans are allowing people who never felt they would be able to own a home to do so.

USDA loan requirements

The buyer and the property determine USDA eligibility. To begin, the house must be located in a qualified “rural” area, which the USDA defines as a population of fewer than 20,000 people.

Second, the buyer’s monthly income must be within USDA guidelines. You can’t earn more than 15% more than the local median income to be eligible. You must also make your home your primary residence (no vacation homes or investment properties allowed). Borrowers must also meet USDA’s “ability to repay” requirements, which include::

  • Income eligibility entails having a steady job and a monthly income, as shown by tax returns.
  • Credit requirements — A FICO credit score of at least 640 is required (though this can vary by lender)
  • Existing debt ratio — In most situations, a debt-to-income ratio of 41% or less.

 

 

USDA loan rates: What is the difference between FHA & conventional?

When compared to other loan programs, USDA mortgage rates are among the lowest available.

USDA rates are typically balanced only by the VA loan, which is only available to veterans. Because the USDA and VA programs are government-backed, they may offer lower-than-market interest rates.

Other mortgage plans, such as FHA and conventional loans, may have interest rates that are 0.5 percent to 0.75 percent higher on average than USDA rates.

Mortgage rates, on the other hand, are highly variable. Obtaining a USDA loan does not guarantee that your interest rate will be “below-market” or that it will correspond to the USDA loan rates advertised.

To get the best interest rate and monthly payments, you must have a high credit score and few debts. Making a larger down payment also helps. You should also shop around with several USDA mortgage lenders. Each USDA lender sets its own rates, so comparing personalized rates from multiple companies is the only way to find the best deal.

>>More: How to get a certificate of Eligibility?

How USDA loans work

With a USDA loan, buyers can finance 100% of the cost of a home while paying lower-than-average interest rates. Because USDA mortgage rates are lower than those of other low-down-payment loans, this is the case.

USDA loans, on the other hand, aren’t all that common. The repayment plan does not include a “balloon” or anything out of the ordinary; the closing costs are standard, and there are no prepayment penalties. USDA loans differ in two ways: the loan type and the down payment amount.

You don’t need a downpayment with a USDA loan. This is one of only two significant loan programs that accept no money down. A fixed-rate loan is required under the USDA loan program. The USDA rural loan program does not offer adjustable-rate mortgages. Rural loans are available to both first-time and repeat home buyers. The USDA program does not require homeowner counseling.

  • Mortgage insurance is required for USDA loans (MI)
  • USDA mortgage loans are “guaranteed,” which means that mortgage lenders are protected if USDA borrowers default. However, the program is self-funded in part.
  • The USDA collects homeowner-paid mortgage insurance premiums to keep this loan program going.
  • USDA has reduced its mortgage insurance costs for both the upfront and monthly fees as of October 1, 2016. The following are the current USDA mortgage insurance rates:
  • For purchases, there is a one-time fee of one percent of the loan amount.
  • For refinancing, there is a one-time fee of one percent of the loan amount.
  • A 0.35 percent annual fee is charged each year based on the remaining principal balance for all loans.

As an example, a home buyer with a $100,000 loan would pay $1,000 in upfront mortgage insurance and $29.17 per month for annual mortgage insurance. The upfront mortgage insurance provided by the USDA is not paid in cash. It’s automatically added to your loan balance, so you can pay it off over time.

Mortgage insurance rates for USDA loans are lower than for conventional or FHA loans.

  • A 1.75% upfront mortgage insurance premium and 0.85% annual mortgage insurance premium are included in FHA mortgage insurance premiums.
  • Private mortgage insurance (PMI) premiums on conventional loans vary but are frequently over 1% per year.

Mortgage insurance premiums on USDA-guaranteed loans are a fraction of what you’d normally pay. Even better, USDA loan rates are competitive. USDA mortgage rates are frequently the most affordable among FHA, VA, and conventional loan mortgage rates, especially for buyers who have a small or no down payment. USDA mortgage rates can be over 100 basis points (1.00 percent) or lower than comparable conventional loan rates for a buyer with an average credit score. Lower interest rates usually mean lower monthly mortgage payments, which is why USDA loans can be very affordable.

About the USDA Rural Housing Mortgage

The USDA Rural Development Guaranteed Housing Loan is the full name of the Rural Development loan. The program is more commonly referred to as a USDA loan.

The Rural Development loan is also known as a “Section 502” loan, after section 502(h) of the Housing Act of 1949, which allows the program to exist.

This program aims to assist single-family homebuyers and spur economic growth in less-populated, “rural,” and low-income areas.

This may appear to be a constraint. USDA loans, on the other hand, are available in 97% of the United States, including many suburbs near major cities. Any area with a population of 20,000 or less is eligible (or 35,000 in exceptional circumstances).

Despite this, the majority of homebuyers in the United States, including those who qualify for USDA loans, have never heard of or have little knowledge of the program.

This is due to the fact that the USDA loan program did not begin until the 1990s. It was only recently updated and adjusted to appeal to buyers in rural and suburban areas across the country.

Many USDA-approved lenders don’t even have a USDA loan option on their menu of loan options. However, many do.

If you believe you qualify for a USDA loan with no down payment, it’s worth asking for a list of lenders who offer this program.

USDA home loan FAQ

What is a USDA loan?

USDA loans are special mortgages designed for homebuyers with a low to moderate-income. The US Department of Agriculture backs these loans. USDA lenders are protected by this guarantee, which allows them to offer below-market interest rates and zero-down home loans.

USDA runs this program to increase economic development and homeownership in rural areas.

How do you qualify for a USDA loan?

If you have an average salary in your area and a credit score of 640 or higher, you may be eligible for a USDA loan. USDA loans can be used to purchase a home only in a rural or suburban setting. Qualifying areas usually have a population of fewer than 20,000 people.

What is the income limit for USDA home loans?

The median income determines the USDA income limit in your area. You can’t make more than 15% more than the median income to qualify for a USDA loan. For example, if the median annual salary in your city is $65,000, you may be eligible for a USDA loan if your annual salary is $74,750 or less. $65,000 + $9,750 = $74,750 (15 percent of $65,000 = $9,750).

Is a USDA loan good?

For buyers with a moderate or low income, a USDA loan is a great option. It allows you to buy a home with no money down and low-interest rates, which are two significant advantages that only one other loan program (the VA loan) provides. It’s worth looking into a USDA-guaranteed loan if you live in an eligible area. The primary disadvantage is that USDA loans are subject to mortgage insurance. If you have a 20% down payment, a conventional loan with no mortgage insurance payment may be preferable.

Is USDA better than FHA?

Both programs require mortgage insurance and allow you to buy with a low down payment. USDA loans can be used with no money down, but the home must be in a designated rural area, and the buyer must meet certain income requirements.

The FHA requires a 3.5 percent down payment, but there are no restrictions on location or income. FHA also has less stringent credit requirements (a 580 credit score is required for FHA vs. 640 for USDA). The best loan type for you is determined by the location of your purchase and your financial situation.

How does the USDA loan work?

USDA loans are not government-sponsored loans. However, because the United States Department of Agriculture backs them, they can offer no money down and low interest rates.

Aside from that, USDA loans function similarly to other types of mortgages. Mainstream lenders offer them, and you can apply online, in person, or over the phone. You’ll also need to get pre-approved for a USDA loan based on your income, credit, debt, and other factors. Another distinction is that the lender must submit the loan file to USDA for approval. This can add a maximum of three weeks to the processing time of your loan.

 Is there a required credit score for the USDA loan program?

USDA implemented a minimum score of 640 on December 1, 2014. USDA had set no minimum score for the program prior to that date. The majority of lenders, on the other hand, did not. When the USDA established an official credit score minimum, it did not disqualify a large number of additional buyers.

If you don’t have a credit score, your lender may accept “alternate” tradelines to help you establish credit. (For example, on-time rent and utility payments, which aren’t usually reported on a credit report.)

What is the USDA program’s down payment?

The USDA does not require a down payment. With a USDA loan, you can finance the entire cost of the home. If you do decide to put down a deposit, your monthly mortgage payments will be lower, and you may be able to afford a more expensive home.

Are USDA mortgage rates good?

USDA loan rates are frequently lower than 30-year fixed-rate mortgage rates. In addition, mortgage insurance premiums are lower. As a result, a USDA loan is frequently less expensive than a comparable FHA or conventional loan.

When mortgage rates fall, can I refinance my USDA mortgage?

Yes, USDA loans can be refinanced. To expedite closings, the USDA Streamline Refinance Program waives income and credit verification. Home appraisals are also not required.

Can I do a cash-out refinance with the USDA program?

No, You cannot. The USDA Rural Housing Program is strictly for purchases and rate-and-term refinances.

Why does the USDA offer the Rural Development loan?

The USDA Rural Development loan is designed to assist low-income families in obtaining housing and mortgage loans in some of the country’s less densely populated areas. The USDA assists in the creation of stable communities for households of all sizes by facilitating homeownership.

What areas are eligible for a USDA loan?

Your home must be in a rural area to qualify for the USDA Rural Housing Program. The USDA, on the other hand, uses a broad definition of “rural.” Many small towns and the suburbs and exurbs of many major U.S. cities meet the agency’s “rural” requirements.

Approximately 97 percent of the landmass of the United States meets the USDA loan’s definition of “rural.” At the time of writing, only 3% of the population was ineligible.

How can I find if my area is USDA-eligible?

The United States Department of Agriculture’s website lists USDA-eligible communities by Census tract. You must provide the exact address of a residence. The website will show whether or not the home complies with the program’s requirements.

Is there mortgage insurance (MI) on a USDA loan?

Mortgage insurance (MI) is required for USDA loans. This includes a one-time fee of 1.00 percent that is added to your loan balance at closing, as well as an annual fee of 0.35 percent that is divided into 12 installments and in addition to your monthly mortgage payments.

Can I finance the Upfront Mortgage Insurance into my mortgage?

Yes, you can finance your upfront mortgage insurance payment by adding it to the total amount of your loan. If you bought a home for $100,000 and borrowed the entire amount from your lender, your Upfront Mortgage Insurance would be $1,000. The loan amount could then be increased to $101,000.

What’s the maximum USDA mortgage loan size?

The USDA sets no loan limits. However, the amount you can borrow is constrained by your income and the debt-to-income ratio of your household.

Debt-to-income ratios are typically capped at 41% by the USDA. Borrowers with a credit score of over 660, stable employment, or a demonstrated ability to save may be eligible for a more lenient program.

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 US 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 only available as a fixed-rate 30-year mortgage. The USDA does not offer a 15-year fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM).

How much are the closing costs for a USDA mortgage?

Closing costs differ depending on the lender and the location. Some lenders, for example, have high origination fees. Others, however, do not. State and local governments are in the same boat. Some states have high costs while others have low costs. Because closing costs differ, shop around for the best combination of low mortgage rates and low closing costs.

Do I have to escrow my taxes and insurance with a USDA mortgage?

USDA loans do require borrowers to escrow their property taxes and homeowners insurance with the lender. This means you will pay your taxes and insurance each month in addition to your mortgage. Real estate taxes and annual homeowner insurance cannot be paid separately.

I can’t afford closing costs. Can I get a gift for my closing costs?

Yes, gifts from family and non-family members are permitted with USDA loans. Notify your loan officer as soon as possible if you plan to use gifted funds, as this will necessitate additional documentation and verification on the lender’s end.

I negotiated to have the seller pay my closing costs. Is that allowed?

Yes, the USDA Rural Housing Program allows sellers to pay for closing costs for their buyers. This is known as “Seller Concessions.” State and local government fees, title charges, lender costs, and any number of home and pest inspections may all be covered in full or in part by seller concessions.

Can I use the USDA loan for a vacation home?

No, you cannot. The USDA loan cannot be used to purchase a vacation home. It is strictly meant for primary residences only.

Can I use the USDA loan for an investment property?

No, the USDA loan might not be used to purchase investment properties.

Can I use the USDA loan program for my working farm?

No, the Rural Housing Program is only for residential property.

I recently went back to work. How long until I am USDA-eligible?

If you have a W-2 job, you are immediately eligible for USDA financing; you do not need a work history. You might not be able to use your bonus income for qualification purposes if you have less than two years on the job.

I am self-employed. Can I use the USDA loan program?

Yes, the USDA Rural Housing Program is available to self-employed people. If you are self-employed and want to use USDA financing, you will be asked to provide two years of federal tax returns to verify your self-employment income, just like you would with FHA or conventional financing.

Can I use the USDA loan program for a new construction home?

Yes, the USDA loan program can be used for new constructions and newly-built homes.

Can I use the USDA loan program to make repairs and improvements to an existing home?

Yes, you can use a USDA loan to make eligible repairs and improvements to your home. This may entail replacing windows or appliances, preparing a site with trees, walks, and driveways, connecting water, sewer, electricity, and gas, and drawing fixed broadband service to the home.

Can I use the USDA loan program to make a home accessible to people with physical handicaps?

Yes, you can use a USDA loan to permanently install equipment to help family 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 buy and install energy-efficient materials like windows, roofing, and solar panels.

Can a non-citizen qualify for a USDA loan?

Yes, legal permanent residents of the United States and US citizens are eligible to apply for a USDA loan.

Does income eligibility include household income?

Yes, a borrower’s household income must be less than 115 percent of the median income in the area.

Today’s USDA mortgage rates

USDA mortgage rates are usually the most affordable on the market (next to VA loans). Because interest rates are already near record lows, many USDA-qualified home buyers can get fantastic deals right now.

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