USDA loans are the loans which are backed by the US Department of Agriculture. These loans are specifically designed for low-to-moderate income individuals. Other than the credit score report of the individual and the usual mortgage approval standards, USDA loans also take into account the house size and geography.

What are USDA Loans?

By definition, USDA loans are offered by the US Department of Agriculture which are zero down payment mortgages for the rural homebuyers who are eligible. The USDA loans are issued through the USDA loan program which is also known as the USDA Rural Development Guaranteed Housing Loan Program by the US Department of Agriculture. However, currently USDA loans are one of the least known mortgage types by the individual borrowers. There are three different types of USDA loan programs which are as follows:

  1. Loan Guarantees: The lender who is lending out the USDA loan has some part of the loan guaranteed by USDA. This is similar to the FHA and VA loans. This enables the borrower to get the loan at a lower interest rate regardless of zero down payment. However, if the individual plans to put forward zero or little down payment, they would have to pay a mortgage insurance premium.
  2. Direct Loans: These loans are issued by the US Department of Agriculture. The direct loans are designed for borrowers who have low and very low income. The income thresholds vary from region to region. The interest rates can be as low as 1% with subsidies.
  3. Home Improvement Loans and grants: The home improvement loans and grants allow individuals to repair, renovate and upgrade their homes. This package can also be combined with grants which can then provide assistance up to $275000.

USDA Loans: No Down Payment with Low Rates

As stated earlier, USDA loans are the loans which are guaranteed by the US Department by Agriculture. Under the US Charter, this loan is named as “Section 502” loans. Moreover, this loan is also known as USDA Rural Development Guaranteed Housing Loan Program and Rural Housing Loans. Although these loans are designed for rural areas, there are some suburban areas which are also included in the eligibility requirements of this loan.

Currently, USDA loans are most popular among the buyers because the USDA loan program offers no down payment. The home buyers can finance up to almost 100% of the house’s purchase price. Moreover, they can also make use of the loan to purchase modular and manufactured homes. Since the USDA loans are backed by the US Department of Agriculture, there is a very little risk to the banks which lend these loans. When there is a lower risk, it brings lower interest payment on the loan and this makes USDA loans often the lowest of all the government backed mortgages. The rates offered by USDA loans are typically lower than the rates for FHA, VA and conventional mortgages offered via Fannie Mae and Freddie Mac. Last but not the least, USDA loans also offer Mortgage Insurance Premiums (MIP) to borrowers. The mortgage insurance premium on annual USDA loans is 0.35% of the total loan amount. This percentage is 40% lower than the mortgage insurance premium charged on the FHA backed loans.

USDA loans are also available for first-time home buyers and also for repeat home buyers and can prove to be big money savers. Majority of the closings for USDA loans occurs in 45 days or less.

>>More: USDA Loans Eligibility

USDA Mortgage Insurance Requirements

The USDA loan is backed by the US Department of Agriculture and is partially funded by the borrowers who are using the program. The government is able to keep the USDA program affordable for buyers via the mortgage insurance premium charged to the home buyers. As per today, the USDA loan mortgage rates are as follows:

  • 1% upfront fee paid at closing on the size of the loan
  • An annual fee of 0.35% on the remaining principal balance

For example, Smith is borrowing a $200,000 loan with no down payment. The mortgage insurance cost on this loan includes $2000 upfront mortgage insurance premium and a monthly mortgage insurance payment of %58.33. The borrower can also choose to add this upfront mortgage insurance payment to the amount of loan you borrowed so that you do not have to pay it from your own pocket.

USDA Loan Income Requirements

With the help of Rural Housing Loans, USDA offers 100% financing to home buyers with lower interest rates in the rural as well as suburban neighborhoods. The underwriting approvals are more flexible with respect to the USDA loans. However, the home buyers should be careful about one factor that should be considered while taking up USDA loans and i.e., income limits. USDA loans will not guarantee a mortgage for any household that exceeds the income limits for a specific area. This is because the sole purpose of USDA loans is to help those people achieve home ownership who have low-to-moderate income and are not able to meet the requirements for traditional mortgages. Moreover, in order to be eligible for the USDA loans the annual household earnings should not exceed the median household income for the area by 15%. For instance, based on the household size:

  • Family Member Household (1-4 members): $86,850
  • Family Member Household (5-8 members): $114,650

It is important to note that income limits vary by area and in areas with high costs for living like California, the income limits are higher. Household members with more than 8 members can add 8% for every additional member to their household of 1-4 members of the household.

Qualifying for USDA Loans

In order to qualify for USDA loans, the borrower must fulfil the following requirements.

  1. The borrower must be a US citizen or permanent resident
  2. Monthly debt payments should not exceed 41% of the income
  3. Dependable income for at least 24 months
  4. The monthly payment of mortgage will not exceed 29% of the borrower’s monthly income.

The lender also checks the borrower’s credit score and debt to income ratio. People who have a credit score of 640 and above qualify for the streamlined process. Credit score below 640 requires the borrower to undergo strict underwriting requirements.

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