USDA Home Loans : A Complete Guide


The USDA loan program was created to help low-income borrowers in rural areas of the country become homeowners.

This article takes an in-depth look at the requirements, guidelines, and eligibility so you can determine if a USDA loan is the right mortgage option for you.

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What are USDA Loans?

USDA loans are guaranteed by the U.S. Department of Agriculture and issued by private lenders.They require a 640 credit score and provide 100% financing so no down payment is required. To be eligible you must be buying a home in a USDA-eligible location and have a total household income that does not exceed 115% of the area median income (AMI).

2021 USDA Loan Requirements

USDA vs. FHA Loans

FHA loans are another type of government-backed home loan that offers a low down payment of 3.5%. The eligibility guidelines for the two types of loans are similar, but there are some key differences.

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Key Differences

  • Credit scores – FHA loans have the lowest credit requirements of any mortgage loan. Borrowers with a credit score as low as 500 may qualify with a 10% down payment and need a 580 credit score with just 3.5% down. USDA loans require a higher credit score because they offer 100% financing.
  • Income limits – USDA financing is only available to low-to-median income borrowers with a household income not exceeding 115% of the area’s median income. FHA loans do not have an income limit, so if your income is too high to qualify for a USDA loan.

 

Credit Requirements

A 620 FICO score is required but lenders look at more than just your credit score when determining if you’re eligible for a mortgage. Negative information on your credit such as late payments and collections, can cause you to be denied even if you meet the minimum credit score requirements.

  • No more than one 30-day late payment on any account in the past 12 months
  • No late mortgage payments in the past six months
  • 24 month waiting period after a bankruptcy or foreclosure
  • Collections, judgments, and federal debt must be paid or on a payment plan

 

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USDA Eligible Properties

USDA loans are only available to borrowers who plan to live in the home as their primary residence. Condominiums and townhouses need to HUD-approved.

Properties financed with a USDA loan must:

  • Not exceed 2,000 square feet
  • Market value not exceeding the area loan limit
  • In-ground swimming pools not permitted
  • Home cannot be used to produce income
  • Market value not exceeding the area loan limit

 

USDA Eligibility Map

When you think of rural America, you imagine farms and large open spaces. However, almost 97% of the country is eligible for a USDA loan. Here is the latest USDA eligibility map below. Everything in green is eligible. Those little blue specs are ineligible areas.

USDA eligibility map

To verify if the home you intend to purchase is eligible, head on to the USDA Eligibility page here.

The current U.S. Department of Agriculture eligibility map shows that rural development loans are available in many areas outside of the major cities. There is an excellent chance that you are located in a “rural” area of the U.S. and eligible for a USDA rural development loan. 0% down payment makes them great if you’re a first-time homebuyer.

USDA Eligible Home Types

  • Single-family home
  • HUD-approved Condos and Townhomes
  • New construction homes
  • Approved modular homes
  • Planned Unit Developments (PUDs)

 

USDA Loan Benefits

  • No down payment needed
  • Up to 50% debt-to-income ratio
  • Low-interest rates
  • Seller can pay 6% of closing costs
  • Fixed-rate and adjustable-rate loan terms
  • No pre-payment penalty
  • Finance closing costs and repairs into the loan

 

No Down Payment (100% Financing)

Amongst the several advantages of the USDA program, the ability to put zero-down and get 100% financing is the most significant benefit.

They are one of only two types of mortgage loans that require no down payment, the other being VA loans. These benefits make these loans perfect for first-time home buyers.

Roll Your Closing Costs into the Loan

Closing costs are fees charged by lenders for processing and issuing a loan. On average, these costs can range from 2%-5% of the purchase price.

USDA loans are the only type of mortgage loan that allows buyers to roll their closing costs into the mortgage. This means you can finance more than 100% of the sales price.

Sellers can pay up to 6% of the closing costs.

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USDA Income Eligibility

USDA loans are for low-to-medium income individuals, families with a total household income that cannot exceed 115% of the area median income (AMI).

For most areas of the county, the USDA income limit for households with 1-4 family members is $75,650 and up to $153,400 in certain high-cost cities.

The USDA loans allow a borrower’s debt-to-income ratio to be as high as 50%.

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USDA Streamline Refinance Program

All types of government-backed home loans are eligible for a streamline to refinance. Streamline refinancing is a quick process that allows USDA borrowers to refinance to a lower rate without needing a lot of paperwork.

USDA Refinance Guidelines

  • The borrower must be current on their payments
  • No late payments in the past 12 months
  • 210 day waiting period
  • The refinance should have a net positive (rate or monthly payments must be lowered as a result)
  • Cash-out refinancing is not an option

 

USDA Housing Repair Loans & Grants

The U.S.Department of Agriculture also offers loans to rural homeowners to make improvements, repairs, and modernize their homes.

This program is available to very-low-income borrowers who cannot find loans anywhere else. USDA grants to low-income elderly homeowners, 62 years of age or older, funds to remove safety and health hazards.

Who qualifies:

You must meet these requirements:

  • Income cannot exceed 115% of the area median income
  • You must be the owner of the property
  • Be able to show usability to receive a loan elsewhere
  • Must live in a rural area as defined by the rural housing loan program
  • To be eligible for grants, you must be at least 62 years of age

 

How much money can I get?

  • $20,000 is the maximum loan amount
  • Grants available up to $7,500
  • Grant-eligible borrowers can also qualify for a loan totaling a maximum program loan amount of $27,500

 

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