How does a USDA loan work? Eligibility & requirements for 2020
USDA loans are mortgages backed the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with low-to-average income for their area, offer 100% financing with reduced mortgage insurance premiums, and feature below-market mortgage rates.
USDA home loans are putting people in homes who never thought they could do anything but rent.
This USDA loan information is accurate as of today, October 1, 2020.Click to check your USDA eligibility now (Oct 1st, 2020)
In this article (Skip to…)
- USDA eligibility
- USDA mortgage rates
- How USDA loans work
- USDA loans require mortgage insurance (MI)
- About the USDA “Rural Housing” mortgage
- USDA home loan FAQ
USDA eligibility is based on the buyer and the property. First, the home must be in a qualified “rural” area, which USDA typically defines as a population of less than 20,000. Second, the buyer must meet USDA income caps. To be eligible, you can’t make more than 15% above the local median salary. You also have to use the home as your primary residence (no vacation homes or investment properties allowed).
Borrowers also have to meet USDA’s “ability to repay” standards, including:
- Steady job and income, proven by tax returns
- FICO credit score of at least 640 (though this can vary by lender)
- Debt-to-income ratio of 41% or less in most cases
To find out if the property you’re buying is USDA eligible, you can use the USDA’s eligibility maps.Find a USDA loan today (Oct 1st, 2020)
USDA mortgage rates: How do they compare to FHA & conventional?
Compared to other loan programs, USDA mortgage rates are usually the lowest available.
USDA rates are typically only matched by the VA loan, which is exclusively for veterans. These two programs — USDA and VA — can offer below-market interest rates because their government guarantee protects lenders against loss.
That said, mortgage rates are personal. Just because you’re getting a USDA loan, doesn’t necessarily mean your rate will be “below-market” or match USDA loan rates advertised.
To get the lowest possible rate, you need an excellent credit score and low debts. Making a bigger down payment helps, too.
You also need to shop around with a few different USDA mortgage lenders.
Each company sets rates differently — so comparing personalized rates from more than one company is the only way to find your lowest option.Find a USDA loan today (Oct 1st, 2020)
How USDA loans work
Using a USDA loan, buyers can finance 100% of a home’s purchase price while getting access to better-than-average mortgage rates. This is because USDA mortgage rates are discounted as compared to rates with other low-downpayment loans.
Beyond that, USDA loans aren’t all that “strange.”
The repayment schedule doesn’t feature a “balloon” or anything non-standard; the closing costs are ordinary; and, prepayment penalties never apply.
The two areas where USDA loans are different is with respect to loan type and downpayment amount.
With a USDA loan, you don’t have to make a downpayment; and you’re required to take a fixed rate loan. ARMs are not available via the USDA rural loan program.
Rural loans can be used by first-time buyers and repeat home buyers alike. Homeowner counseling is not required to use the USDA program.Click to see today's rates (Oct 1st, 2020)
USDA Loans Require Mortgage Insurance (MI)
USDA “guarantees” its loan program — meaning it offers protection to mortgage lenders in case USDA borrowers default. But the program is partially self-funded. So to keep it running, the USDA uses homeowner-paid mortgage insurance premiums.
As of October 1, 2016, USDA has lowered its mortgage insurance costs for both the upfront and monthly fees.
The current USDA mortgage insurance rates are:
- For purchases, 1.00% upfront fee paid at closing, based on the loan size
- For refinances, 1.00% upfront fee paid at closing, based on the loan size
- For all loans, 0.35% annual fee, based on the remaining principal balance
As a real-life example: A homebuyer with a $100,000 loan size in Blacksburg, Virginia, would be required to make a $1,000 upfront mortgage insurance premium payment at closing, plus a monthly $29.17 payment for mortgage insurance.
USDA upfront mortgage insurance is not paid as cash. It’s added to your loan balance for you.
USDA mortgage insurance rates are lower than those for comparable FHA loans or conventional ones.
- FHA mortgage insurance premiums include a 1.75% upfront mortgage insurance premium, and 0.85% in MIP annually
- Conventional loan private mortgage insurance (PMI) premiums — even via the 3%-down HomeReady™ program — can range above one percent annually
With USDA loans, then, mortgage insurance premiums are just a fraction of what you’d typically pay. Even better, USDA mortgage rates are low.
USDA mortgage rates are often the lowest among FHA mortgage rates, VA mortgage rates, and conventional loan mortgage rates — especially when buyers are making a small or minimum downpayment.
For a buyer with average credit scores, USDA mortgage rates can be 100 basis points (1.00%) or more below the rates of a comparable conventional loan.
Lower rates mean lower payments, which is why USDA loans can be extremely affordable.Click to see today's rates (Oct 1st, 2020)
About The USDA / Rural Housing Mortgage
The Rural Development loan’s full name is the USDA Rural Development Guaranteed Housing Loan. However, the program is more commonly known as a USDA loan.
The Rural Development loans is also sometimes called a “Section 502” loan, which refers to section 502(h) of the Housing Act of 1949, which makes the program possible.
This program is meant to help home buyers and stimulate growth in less-populated or “rural” areas.
That might sound restrictive. But in fact, 97% of the US map is eligible for USDA loans. Any area with a population of 20,000 or less can be eligible (and 35,000 in special cases).
>> Related: USDA loans: Eligible geographic areas
Yet most U.S. home buyers haven’t heard of this program, or know little about it.
This is because the USDA loan program wasn’t launched until the 1990s. Only recently has been updated and adjusted to appeal to rural and suburban buyers nationwide.
Most lenders don’t even list the USDA loan on their menu. But many offer it.
So if you think you’re eligible for a zero-down USDA loan, it’s worth asking your shortlist of lenders whether they offer this program.Find a USDA loan today (Oct 1st, 2020)
USDA home loan FAQ
USDA loans are special mortgages meant for low- to moderate-income home buyers. These loans are guaranteed by the US Department of Agriculture. That guarantee acts as a form of insurance protecting USDA mortgage lenders, so they’re able to offer below-market interest rates and zero-down home loans. USDA runs this program to encourage homeownership and economic development in rural areas.
You might qualify for a USDA loan if you have an average salary for your area and a credit score of 640 or higher. USDA loans can only be used to buy a home in a rural or suburban neighborhood. Typically, only areas with a population under 20,000 qualify.
The income limit for USDA home loans is based on your area’s median salary. To be eligible for a USDA loan, you can’t exceed the median by more than 15%. For example, if the median salary in your city is $65,000 per year, you could qualify for a USDA loan with a salary of $74,750 or less. (15% of $65,000 = $9,750 → $65,000 + $9,750 = $74,750)
A USDA loan is a great option for buyers with moderate income. It lets you buy a house with nothing down and low mortgage rates — two huge benefits that only one other loan program (the VA loan) offers.
If your home is in an eligible area, it’s worth exploring a USDA loan. The main drawback is that USDA loans require mortgage insurance. So if you can make a 20% down payment, you might prefer a conventional loan with no mortgage insurance payment.
Both programs let you buy with a low down payment and require mortgage insurance.
USDA can be used with zero down, but the home has to be in a qualified rural area, and the buyer has to meet income caps.
FHA requires 3.5% down, but there are no location or income restrictions. FHA is also more lenient about credit scores (580 for FHA vs. 640 for USDA).
The right one for you depends on where you’re buying and your financial situation.
USDA loans are backed by the U.S. Department of Agriculture, so they can offer zero down and low rates.
Aside from that, USDA loans work like other mortgages. They’re offered by mainstream lenders so you can apply online, in person, or over the phone. And you still have to get pre-approved and qualify for a USDA loan based on your income, credit, debt, and other factors.
One other difference is that the lender has to send the loan file to USDA to be approved. This can add around 2-3 weeks to your loan processing time.
On December 1, 2014, USDA implemented a minimum score of 640. Before that date, USDA set no minimum score for the program. However, most lenders did. When USDA implemented an official credit score minimum, it did not exclude very many additional buyers.
If you are without a credit score, your lender may accept “alternate” tradelines to establish a credit history.
The USDA has no down payment requirement. You can finance 100% with a USDA loan.
USDA loan rates are often lower than comparable conventional 30-year fixed mortgage rates. Plus, because mortgage insurance rates are lower, with your small down payment, USDA loans can often be a better deal as compared to FHA loans or conventional loans.
Yes, USDA loans are eligible for refinance. The USDA Streamline Refinance Program waives income and credit verification so closings can happen quickly. Home appraisals aren’t required, either.
No, the USDA Rural Housing Program is for purchases and rate-and-term refinances only.
The USDA Rural Development loan is meant to help households of modest means get access to housing and mortgage loans in some of the less densely populated parts of the country. By enabling homeownership, the USDA helps to create stable communities for households of all sizes.
With the USDA Rural Housing Program, your home must be located in a rural area. However, the USDA’s definition of “rural” is liberal. Many small towns meet the “rural” requirements of the agency, as do suburbs and exurbs of most major U.S. cities.
97% of the United States landmass is USDA loan-eligible. Only 3% is ineligible.
The website of the U.S. Department of Agriculture lists eligible USDA communities by census tract. You are required to provide a home’s exact address. The website will show whether that home meets program guidelines.
USDA loans require mortgage insurance (MI) to be paid. As of December 4, 2019, USDA mortgage insurance premiums include a 1.00 percent upfront fee, which is added to your loan balance at closing; and, an annual fee of 0.35%, which is added to your payment monthly.
Yes, the USDA will let you finance your Upfront Mortgage Insurance payment into your loan size.
For example, if you bought a home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $1,000. You could then raise your loan size to $101,000.
There is no maximum loan size for the USDA loan program. The amount you can borrow is limited by your household’s debt-to-income.
The USDA typically limits debt-to-income ratios to 41%, except when the borrower has a credit score over 660, stable employment, or can show a demonstrated ability to save.
No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers.
The U.S. Department of Agriculture website maintains a list of lenders in the Rural Housing Program.
The Rural Housing loan is available as a 30-year fixed rate mortgage or a 15-year fixed-rate mortgage only. There is no adjustable-rate mortgage (ARM) program available via the USDA.
Closing costs vary by lender and location. For example, some lenders have high origination charges. Others do not. The same is true for state and local governments. Costs are high in some states and low in others.
Because closing costs vary, be sure shop around to find the most suitable combination of low mortgage rates and low costs.
Yes, USDA mortgages require borrowers to escrow taxes and hazard insurance with a lender. You may not pay your real estate taxes or annual homeowners insurance separately.
Yes, USDA loans allow gifts from family members and non-family members.
Yes, the USDA Rural Housing Program allows sellers to pay closing costs for buyers. This is known as “Seller Concessions“.
Seller concessions may include all or part of a purchase’s state and local government fees, lender costs, title charges, and any number of home and pest inspections.
No, the USDA loan cannot be used for a vacation home, it is for primary residences only.
No, the USDA loan cannot be used for investment properties.
No, the Rural Housing Program is for residential property.
If you are a W-2 employee, you are eligible for USDA financing immediately; you don’t need a job history. If you have less than 2 years in a job, however, you may not be able to use your bonus income for qualification purposes.
Yes, self-employed people can use the USDA Rural Housing Program.
If you are self-employed and want to use USDA financing, as with FHA and conventional financing, you will be asked to provide 2 years of federal tax returns to verify your self-employment income.
Yes, the USDA loan program can be used for newly-built homes and other new construction.
Yes, the USDA loan program can be used to make eligible repairs and improvements to a home. This may include replacing windows or appliances; preparing a site with trees, walks, and driveways; drawing fixed broadband service to the home; and, connecting water, sewer, electricity, and gas.
Yes, the USDA loan program can be used to permanently install equipment to assist household members with physical disabilities.
Yes, the USDA loan program can be used to purchase and install materials meant to improve a home’s energy efficiency, including windows, roofing, and solar panels.
Today’s USDA mortgage rates
USDA mortgage rates are typically the lowest on the market (next to VA loans).
Because rates are already near record lows, many home buyers who qualify for USDA can get incredible deals right now.
To find out whether you qualify for a USDA loan — and what your rate is — check with a lender.Verify your new rate (Oct 1st, 2020)
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