The Complete Guide to USDA Loans



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

They have many benefits, but the biggest is that they provide 100% financing to buy a home with no money down.

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.

USDA Mortgage Rates (Novermber 2020)

Loan Term

Interest rate

APR

30-year fixed-rate mortgage

3.35%

3.58%

15-year fixed-rate mortgage

3.11%

3.31%

5/1 adjustable-rate mortgage

3.25%

3.49%

What are USDA Loans?

The USDA guaranteed loan program was created by the U.S. Department of Agriculture to make becoming a homeowner in rural America easier. It’s a 100% financing mortgage loan for moderate-to-low income homebuyers in eligible rural and suburban areas. The Government ensures the mortgages which protect lenders in the event the borrower defaults on the loan.

USDA Loan Requirements

2020 USDA Loan Requirements

• 640 minimum credit score

• Total household income less than 115% of the average in your area

• Maximum 43%-50% debt-to-income ratio

• Two years of stable employment history

• Occupy the property as your primary residence

• Prove of income (Two years of tax returns and W2's)

• Must be in an eligible rural area

• Work with an approved USDA lender

Credit Requirements

A 620 FICO score is required to be eligible for the USDA loan program. But lenders look at more than just your credit score when determining if you’re eligible for a mortgage.

Negative information on your credit history, such as late payments and collections, can cause you to be denied even if you meet the minimum credit score requirements.

USDA Credit Requirements

• Minimum 620 credit score

• 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, judgements, and federal debt must be paid or on a payment plan

USDA loans are Governed by:

  • The Housing Act of 1949 as amended, 7 CFR, Part 3550,
  • HB-1-3550 – Direct Single Family Housing Loans Field Office Handbook

 

More » USDA Credit Requirements

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 the country. 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 Loan Eligible Properties

 Single-family home

 HUD-approved Condos and Townhomes

• New construction homes

 Approved modular homes

 Planned Unit Developments (PUDs)

USDA Loan Benefits

USDA Loan Benefits

• 100% financing - No down payment needed

• Flexible credit and qualifying requirements

• 620 credit score required

• Up to 50% debt-to-income ratio

• No cash reserves required

• Low interest rates

• The 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.

Check Today’s Mortgage Rates

Low Mortgage Insurance Premium

USDA mortgages have the lowest mortgage insurance premium (MIP) of any home loan program besides VA loans, which require no mortgage insurance.

The annual MIP is just 0.35%. When compared to the FHA PMI fee of 0.85%, the savings are substantial.

On a $200,000 home, PMI on an FHA loan is $1700 per year. For a $200,000 home, USDA PMI will be just $600 annually, a savings of $1100 per year.

There is a one-time up-front mortgage insurance payment of 1% of the loan amount added into the loan.

Borrowers save an average of $100 per month with a USDA home loan over FHA loans because of the reduced MIP rate.

USDA Income Limits

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%.

More » USDA Income Limits

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.

  • 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 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, FHA loans are a great alternative.

FHA Loans

USDA Loans

Credit Score

500 with 10% down
580 with 3.5% down

640

Down Payment

10% down with 500 score
3.5% down with 580 score

No down payment

Mortgage Insurance

Up-front MIP payment Monthly MIP payments

>10% down MIP cancels in 11 yrs *
<10% down MIP required for the life of the loan

Monthly PMI payments

MIP required for the life of the loan

Loan Limits

Low-cost area - $331,760
High-cost area - $765,600

No USDA loan limit

Debt-to-Income

43% - 50% max DTI depending on the lender

43% - 50% max DTI depending on the lender

Income Limits

No income limits

115% of the area median income

More » USDA vs. FHA Loans

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.

  • 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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