The U.S. Department of Agriculture doesn’t just provide nutrition services.
USDA also guarantees loans in eligible rural areas of the country.
When you think “rural,” you think of Famers and cows.
However, what if I told you that 97% of the country is in an eligible area?
Sounds crazy, doesn’t it?
But, it’s true.
Look at the latest USDA eligibility map below. Everything in green is eligible. Those little blue specs are areas that are ineligible.
» MORE: Get Preapproved for USDA
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-backed mortgage. 0% down payment makes them great for first-time homebuyers.
You can check if a particular address is eligible here
What is the USDA Home Loan Program?
The USDA Guarantee loan is a 100% financing mortgage for moderate-to-low income homebuyers in eligible rural and suburban areas.
Loans are issued through the USDA Rural Development Guaranteed Housing Loan Program, which was created by the U.S. Department of Agriculture.
USDA loan guarantees: USDA 502 direct loan guarantees a mortgage issued by private lenders. In this way, they are similar to FHA and VA Loans.
The Government ensures the mortgages which protect lenders in the event the borrower defaults on the loan. Government-backed loans will require mortgage insurance for them to guarantee the mortgage loan.
There is a guarantee fee that can be rolled into the loan.
Benefits of The USDA Loan Program
No Downpayment Loan (100% Financing)
Amongst the several advantages of the USDA program, the ability to put zero-down and get 100% financing is one of the most significant benefits. 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 a buyer to roll their closing costs into the mortgage. This means you can finance more than 100% of the sales price.
The seller can pay up to 6% of the closing costs for the buyer.
Low Mortgage Insurance Premiums
USDA mortgages have the lowest mortgage insurance premium of any home loan program besides the VA, which requires no mortgage insurance.
The annual MIP is just 0.30%. When compared to the FHA PMI fee of 0.85%, the savings is substantial.
On a $200,000 home, PMI on an FHA loan is $1700 per year. 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 that is added into the loan.
Borrowers save an average of $100 per month with a USDA home loan over FHA loans because of the reduced mortgage insurance.
USDA Home Loan Benefits
- Zero downpayment
- Low mortgage rates
- Finance more than 100% of the sales price
- Low PMI (mortgage insurance)
- 30yr and 15yr fixed rate options available
- 640 credit score required
- 97% of the U.S. is in an eligible zone
- Must wait 36 months after a bankruptcy or foreclosure to qualify
- Owner-occupied properties only
- Easier to qualify for that conventional mortgages
USDA Loan Requirements
- Meet the income limit requirements
- Be a U.S. citizen, non-citizen national or qualified alien
- Occupy the property as your primary residence
- Show a willingness to meet debt obligations
- The home must be in an eligible location
- Work with a USDA-approved lender
- Have an adequate credit score for the loan, preferably 620-640 or higher
To verify if the home you intend to purchase is eligible, head on to the USDA Eligibility page here. Type the exact address of the house in the search box provided, click “GO,” and the site will show the eligibility status of the house.
USDA Income Limits
USDA loans are for low-to-medium income individuals and families.
Your household income cannot exceed 115% of your area median income.
Most moderate-income families will meet the income requirements for a rural development loan.
For most areas of the county, the income limit for households with 1-4 family members is $75,650 and up to $153,400 in certain high-cost cities.
The maximum debt-to-income ratio for USDA loans is higher than a conventional loan.
You should speak to a lender to determine your eligibility.
Check the income requirements in your county on the USDA website
USDA Property Eligibility
- Single-family home
- New constructions
- HUD-approved Condos
- FHA approved Modular homes
- Planned Unit Developments (PUDs)
Properties financed with direct loan funds 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
USDA Loan Limits
The loan limits for the USDA program vary from county to county based on the median home prices in the area. Check the loan limits in your county here.
In 2012 the USDA launched its streamline refinance program. The streamline refinance is for borrowers with a USDA mortgage loan who have a rate higher than the current interest rate.
- Currently have a USDA home loan
- The borrower must be current on their mortgage
- 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 and 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, to remove safety and health hazards.
You must meet these requirements:
- Very-low income less than 50% of the median income in the area
- 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
USDA Loan Credit Score Requirements
The U.S. Department of Agriculture recently changed the credit requirements. A 640 FICO score is required for a USDA loan. Before this change, homebuyers could qualify with less than adequate credit history.
These 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
Raise Your Credit Score for a USDA Loan
If your credit rating is under 640 and you want a USDA loan, the only chance you have is to increase your credit score so you’ll be eligible. There are few techniques you can do to improve your credit score before applying for a mortgage loan.
Pay Down Credit Card Balances
Your credit utilization ratio is the ratio of the amount of your credit card limits you are using. It accounts for 30% of your overall credit score. Only your payment history (35%) has a more significant impact on your credit score. Try to pay down the balances your cards to less than 20% of the limit to maximize your scores.
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Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.