USDA home loans are mortgages provided by the U.S. Department of Agriculture for eligible rural homebuyers as part of the USDA Rural Development Guaranteed Housing Loan Program. Rural individuals with low-to-average income become qualified under this program to buy homes. The USDA program offers home loans with no down payment, below-market mortgage rates, and reduced mortgage insurance. The program has helped hundreds of rural folks who never thought they could own a house to invest in their own homes.
USDA Loan Requirements
The eligibility for a USDA loan is based on the property and the buyer. The home should be located in a qualified “rural” area – which is defined as a population of less than 20,000. The other requirement is the buyer should meet the USDA monthly income cap. To be eligible for the program, you cannot make more than 15% above the local median income. The home should be used as your primary residence, and no vacation or investment homes will be allowed under the scheme. On the other hand, the borrower should meet USDA’s “ability to repay the loan” including:
Income Eligibility – A steady job with a monthly income that is proven by tax returns
Credit Requirements – FICO credit score of at least 620 (this may vary by lender)
Existing Debt Ratio – The existing debt-to-income ratio should be 41% or less
In fact, USDA loan rates are considered some of the lowest available in the market today compared to other popular loan programs. USDA rates are only matched by VA loans – which are exclusively for veterans. USDA and VA loan programs are able to offer below-market interest rates since the government guarantee helps protect lenders against loss. Most of the time, other popular mortgage programs such as FHA and conventional loans have interest rates around 0.5% – 0.75% higher than USDA rates. That being said, mortgage rates are mostly personal. Applying for a USDA loan doesn’t guarantee that your rate will be below-market at all times or match the loan rates advertised by the USDA.
You’ll need an excellent credit score and low debts to get the lowest possible interest rate and monthly repayments. Making a bigger down payment will also help. You also need to shop around to find the right USDA mortgage lender when applying for such a loan. Each lender will have different interest rates. That is why you need to compare rates from different lenders before you choose the right lender.
How do USDA Loans Work?
The buyer has access to better-than-average mortgage rates and can finance 100% of the home’s purchase price with a USDA home loan. That is because USDA home loan rates are discounted compared to other low-down payment loans. Most of the other features are similar to conventional loans. The repayment schedule doesn’t feature anything non-standard. The closing costs are ordinary, and repayment penalties never apply for USDA loans. The two main areas where USDA loans differ from conventional loans are the down payment amount and loan type.
You won’t be making a down payment with a USDA loan. This is one of only two popular loan programs that have zero down payments. The USDA program lets you obtain a fixed-rate loan since adjustable-rate mortgages are not available under this program. The program can be used by first-time and repeat homebuyers alike. Homeowner counseling isn’t required under the USDA loan program.
USDA loans require mortgage insurance or MI. It provides protection to mortgage lenders in case the borrower defaults. But the program is partially self-funded. In fact, the USDA program charges homeowner-paid mortgage insurance premiums to keep the program running. The USDA program has already lowered its loan insurance costs for both monthly and upfront fees as of October 1, 2016. The current USDA loan insurance rates are:
For Purchases – 1.00% upfront fee based on the mortgage loan amount
For Refinancing – 1.00% upfront fee based on the mortgage loan amount
For All Loans – 0.35% annual fee which is based on the remaining principal balance of the year
Example – A homebuyer with a $100,000 mortgage loan would have a $1,000 upfront mortgage insurance cost and a monthly payment of $29.17 for the annual mortgage insurance.
The USDA upfront mortgage insurance isn’t paid in cash. It will be added to the loan balance of the borrower to pay over time. USDA mortgage insurance rates are usually lower than mortgage insurance rates of conventional and FHA loans. FHA mortgage insurance premiums include a 1.75% upfront insurance premium and 0.85% for the annual mortgage insurance. On the other hand, conventional loan private mortgage insurance premiums (PMI) vary but could be above 1% annually. With a USDA loan, the mortgage insurance premium is just a fraction of what you will typically pay. USDA mortgage rates are quite low right now.
USDA mortgage rates are often the lowest compared to FHA, VA, and conventional mortgage rates – when the buyer is making a small or minimum down payment. For a homebuyer with an average credit score, USDA mortgage loan rates can be 100 basis points (1.00%) or more below the rates of conventional loans. Lower rates equal lower mortgage payments every month – which is why USDA loans can be quite affordable.
About the USDA Rural Housing Mortgage
The full name of the Rural Development Loan is USDA Rural Development Guaranteed Housing Loan. But the program is commonly known as USDA Loan Program. The USDA loan program is known as a “Section 502” loan at times. This is because it refers to section (502)h of the Housing Act of 1949 that makes the entire program possible. This program is designed to assist single-family home buyers as well as stimulate growth in “rural” and low-income areas. Even though it may sound somewhat restrictive, more than 97% of the US map is eligible for USDA loans – this includes suburban areas and major cities. For example, any area that has a population of 20,000 or less is eligible (35,000 or less in some special cases).
Most homebuyers – even those who have USDA mortgage loan eligibility – have not heard of the USDA loan program or know very little about it. Although the USDA loan program was launched in the 1990s, it was updated and adjusted to appeal to rural and suburban buyers countrywide only recently. Most USDA-approved lenders may not list the program on their loan application menu but offer it anyway. If you think that you may be eligible for a zero-down USDA mortgage, you should ask the lender whether they offer the program.
USDA Loan Eligible Geographic Areas
Currently, if you want to buy a home, you will not find many loans that don’t require a down payment. Actually, only VA and USDA loans allow people to buy homes without a down payment. To qualify for a VA loan, you must be a member of the military. However, to qualify for the USDA loan, your location is the main factor considered.
USDA loans were created to allow economic development in the less-dense (rural) areas of the U.S. Note that USDA loans are also known as RD or rural development loans. As provided in the USDA eligibility maps, you can only use the loan within certain locations.
Geographic Eligibility for a USDA Mortgage
You can check your area on the USDA Eligibility Map to see if it qualifies for a USDA Mortgage. Some states are completely eligible, like Wyoming. Note that, at least 97% of the U.S land mass is eligible for the loan, about 109 million people. Some suburban areas qualify since the maps haven’t been updated for a while but you need to apply for the loan before the boundaries change.
Most people looking to buy homes in the suburban areas assume that their homes are not eligible. When you do a proper search, you will find eligible locations within 30 minutes of your workplace. For a town to be eligible it must meet the following.
Have a population of less than 20,000 people
Located in a rural place with rural characteristics
Have lack of available credit
Some of the new rules classify an area to be rural if the population is below 35,000 but the newest census will determine the rules. Currently, cities with a huge population are still eligible for the Rural Housing loan. Note that USDA loans offer a lot of value in the home buying market today.
They were created for people who make a modest income. As such, the underwriting standards are very lenient. If you have always wanted to own a home, you can do so with the USDA loan program. Check your eligibility today and get your dream house without a down payment.
USDA Loan Credit Score Eligibility
A Zero-Down Program for Buyers with Moderate Credit
Are you thinking about buying a house? Well, you might be excited about it until a lender decides to pull your credit report, only to find out that your credit score is terrible.
You don’t have to give up just yet because there are mortgage programs even for people with lower credits, especially USDA loans. These were designed to help suburban and rural renters interested in buying homes. USDA loans are still available today, especially for people with good credit scores.
What Is the Minimum Credit Score for USDA Loans?
Most lenders will lend people with a minimum of 620 as their credit score under the USDA loan program. However, if you have a lower score, you are not completely banned. According to the fine print, your loan might be approved if you experienced an extenuating circumstance that lowered your credit score.
Some of the acceptable extenuating circumstances include the following.
Layoff due to reduction in workforce
Other events outside your control.
Note that the extenuating circumstance must be a one-time event that will not recur. It should not be caused by your inability to manage your finances. If you have an extenuating circumstance but are not sure whether you qualify, talk to a lender.
USDA loans are not limited to buyers who have challenged credit scores. They offer fantastic value and the lowest interest rates for all types of borrowers. If you have a credit score of at least 680, you will enjoy a streamlined approval process. You don’t need to provide verification of rent at this point.
USDA Mortgage Rates and Down Payment Requirements
USDA loans are essentially U.S. Department of Agriculture guaranteed mortgage loans. The official name of the program is the Rural Development Guaranteed Housing Loan Program, or the “Section 502 Loan”, which is named based on its place in the USDA charter.
USDA loans are also referred to as “Rural Housing Loans”, which can be somewhat of a contradiction. While the program can be used in rural areas, many suburban areas are also eligible for the program.
USDA loans are popular among home buyers since the USDA program provides no-money-down financing. Home buyers can finance 100 percent of the purchase price of the home and can actually use the loan for purchasing a modular or manufactured home.
Moreover, since the U.S. Department of Agriculture guarantees USDA loans, they pose very little risk to the banks that make them. Low risk attracts low rates, which is why USDA mortgage rates today are usually the lowest of all mortgages that are backed by the government.
Daily USDA Mortgage Rates for 7.30.21
30 Day Range 2.5% - 3.186%
*Calculated from actual locked rates with consumers across more than one-third of all mortgage transactions closed nationwide
USDA mortgage rates are usually lower than those of VA loans, FHA loans, or even conventional loans via Fannie Mae and Freddie Mac.
The USDA loan program also offers borrowers reduced mortgage insurance premiums (MIP). The yearly USDA mortgage insurance premium is 0.35 percent of the loan, which is 40 percent less than the mortgage insurance premium charged for a comparable loan by the FHA.
USDA loans can be major money-savers, and are offered to both first-time home buyers along with repeat home buyers. Homeownership counseling isn’t a requirement for using the USDA home loan program.
The vast majority of closing can happen in 45 days or less.
7 Steps to Consider When Purchasing Your Home
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The USDA mortgage is U.S. Department of Agriculture backed, and partially funded by borrowers that use it. The government manages to keep the Rural Housing Loan program relatively affordable through mortgage insurance premiums charged to program homeowners.
The mortgage insurance rates for USDA loans were last changed in October 2016 and those rates are still in effect to this day.
The USDA mortgage insurance rates are as follows today:
1.00% upfront fee based on loan size, paid at closing
0.35% annual fee, based on remaining principal balance
Take a real-life example of how USDA mortgage insurance works, let’s assume that a Cary, North Carolina home buyer plans to borrow $200,000 for the purchase of a home with no money down.
The mortgage insurance costs incurred by the buyer include a $2,000 upfront mortgage insurance premium, along with a monthly $58.33 mortgage insurance payment. You can decide to include the upfront mortgage insurance to the loan amount to avoid paying it out-of-pocket.
Keep in mind that the USDA upfront mortgage insurance isn’t required to be paid as cash. You can add it to the loan balance for you to reduce the funds needed at closing.
USDA Loan Income Requirements
The USDA offers 100 percent financing via its Rural Housing Loan at incredibly low mortgage rates in rural and suburban areas. Better still, underwriting approvals tend to be more flexible. Applicants aren’t required to meet all requirements in order to have their loans approved. Check the USDA website to see more about USDA Loan Income Eligibility.
Still, there’s one area where the USDA is unyielding. The USDA doesn’t guarantee mortgages for households that exceed their maximum income limits for a particular area. That’s because the purpose of the USDA program is to help people with “modest means” become homeowners.
The agency states that for a household to be eligible for USDA financing, its annual earnings must not be greater than the area’s median household income by over 15%, with an allowance provided for the size of your household.
For instance, the USDA income limit for a household of 8 members is higher than the USDA income limit for a household of just 4 members. Similarly, the income limit for a household of 10 members will be higher than the income limit for a household of 8 members.
USDA income limits have a floor that’s based on the size of the household:
1-to-4 member household – $86,850
5-to-8 member household – $114,650
Keep in mind that USDA income limits vary depending on the area. In San Francisco, California, which has one of the highest costs of living, the USDA income limit for a household of 1 to 4 members is $212,550, while that of a household of 8 members is $280,550.
The income limits in North Carolina (Raleigh) for USDA loans start at just $106,600.
Households of over 8 members can add 8 percent of each extra member to the 1-to-4 member household income limit set by the USDA.
The USDA home loan offers inexpensive mortgage insurance, flexible guidelines, and low rates for home buyers searching for a low- or no-money-down mortgage.
Bankruptcy, Foreclosure Waiting Periods
The waiting periods for people who have suffered major derogatory credit events are as follows.
Foreclosure – 3 years
Chapter 7 Bankruptcy – 3 years (12 months if it was a temporary circumstance which has been resolved)
Chapter 13 Bankruptcy – 12 months after repayment has been completed.
Also, to qualify, you must not have missed your rent or mortgage payments for more than 30 days within the last 12 months.
Getting A USDA Loan With No Credit Score
You need to have 2-3 accounts open for at least 12 months to have a credit score. Some people might not have a credit score because they don’t have a credit history. It is okay not to have a credit score and USDA loan lenders will not use this as a basis to reject your loan application.
If you have insufficient account history or no credit score, USDA lenders will accept non-traditional credit reports. They are regular credit reports but credit agencies will generate them manually through proof of payment documentation for insurance, rent, school tuition, childcare, utilities and other recurring bills.
The lender might approve the loan without using the non-traditional credit report. However, you must have third-party verifications, especially proof of payment of rent on time from a landlord. If you don’t have a credit score, you should be able to buy a home using the loan program effectively.
Check Your USDA Credit Eligibility
Thanks to USDA loans, anyone, even people with lower credit scores can own a home. Most people want to own a home but are often worried that their credit scores are too low to get a mortgage. Check whether you qualify for a USDA loan and buy a home today.
USDA Loan Down Payment And Closing Costs
Are you wondering whether you can buy a home without a down payment? Well, most people don’t buy homes because of the required down payment. However, if you have a USDA loan, this barrier has been completely removed. Besides the VA loan for military people, the USDA loan is yet another way you can buy a home without paying a down payment.
When applying for a USDA loan, you need to look for a home in an eligible location, anywhere in the US. If you don’t have enough money to buy a home, the USDA loan program offers mortgage programs that should get you closer to owning a house.
How Much are the Closing Costs with USDA Loans?
With USDA mortgages, there is no down payment necessary. Note that, with FHA loans, you need a down payment of 3.5% while conventional loans require 3 to 5% down payment. Therefore, if you want to buy a home worth $200,000 the following down payments would be applicable.
No down payment is required for USDA loans. FHA loans the down payment is 3.5%which is $7,000. Conventional 97 loans have 3% down payment which is $6,000 and conventional 95 loans have 5% down payment which is $10,000. Note: for USDA loans, you don’t need any down payment but you need to pay the following closing costs that will add up to a few thousands. Closing costs are divided into
Costs to acquire the loan and the transfer title
Expenses associated with the property
The costs to acquire the loan and property will vary depending on the company and lender. However, the expenses associated with the property will not change regardless of where you get the loan.
1. Costs To Acquire The Loan And Property
These include the title and lender fees and usually vary depending on the provider. They can be summarized as follows.
Loan Origination Fees – 0% to 1% of the total loan amount
Credit Report/Miscellaneous Lender Fees – $300
Underwriting/Admin/Processing Fee – $500 to $1000
Appraisal – $300 to $500
Escrow Fee – $500
Title Fee – $500 to $1000
Signing Fee – $100
County Recording and Miscellaneous Title and Escrow Fees – $300
2. Expenses Associated with the Property
There certain expenses that come up when you own a home. When you apply for a mortgage, the lender will ask you to prepay these expenses for a few months to guarantee that your home will not be seized by the government, especially if there are unpaid taxes or if it is at risk of damage because you don’t have insurance. These expenses include the following.
Property taxes at 1% of the value of the property payable every year.
Homeowner’s insurance about $500 to $1000 every year depending on the value of the house.
Your mortgage lender will require these amounts to be collected with the other closing costs when the loan is finalized.
4 to 8 months of property taxes
12 to 14 months of homeowner’s insurance
Therefore, if the value of your home is $200,000 and the property taxes amount to 1% every year, the homeowner’s insurance is $600 every year, the mortgage lender will collect as follows:
$700 in prepaid insurance for 14 months
$1,000 in prepaid taxes for 6 months.
Once the fees are collected, the lender will forward the payment to the county tax office and your insurance company. The lender handles these payments to make sure that everything is paid in full. Other expenses such as a home inspection or warranty are beneficial but they are not mandatory and your lender will not collect them. Use the following strategies to pay for your closing costs. Remember, you don’t have to pay for USDA mortgage closing costs out of your own pocket.
You can actually take a bigger loan amount to help you pay for the closing costs, especially if the appraised value is higher than the purchase price such as follows. If the sale price is $200,000, the appraised value is $205,000 you can take $5,000 extra to pay the closing costs. You can also pay the closing costs in other ways such as follows.
In some places, the seller should be able to add some extra amount for the closing costs. These are available when the seller is motivated but not getting a lot of offers on the home.
The mortgage lender can increase your rate slightly and give you a credit for the extra profit from the higher rate such as 4.0% without lender credit while 4.25% with $3,000 lender credit. The money can be used for escrow, title and lender fees as well as insurance and property taxes.
You can ask a family member or your employer for financial assistance as a gift to pay the closing costs.
USDA loans have removed the barriers to homeownership. You should be able to avoid the down payment and handle the closing costs effortlessly. Check with the lender to confirm your eligibility.
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