About the zero-down USDA home loan
What if you could buy a house with no down payment, cheap mortgage rates, and reduced mortgage insurance costs?
That might sound too good to be true. But one home loan program can offer all these benefits: the USDA mortgage. USDA loans are meant to help low- and moderate-income Americans become homeowners. And they do that by offering ultra-affordable financing to eligible home buyers.
In short, USDA home loans are putting people in homes who never thought they could do anything but rent.
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What is a USDA home loan?
USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program. USDA offers financing with no down payment, reduced mortgage insurance, and below-market mortgage rates.
The USDA mortgage program is intended for home buyers with low-to-average incomes. In addition, you must buy a home in a “rural area” (as defined by the USDA) to qualify. Those who are eligible can use a USDA mortgage to buy a home or refinance one they already own.
USDA loans offer nearly unbeatable benefits for qualified borrowers. So if this program sounds like a good fit for you, it’s worth getting in touch with a lender to find out if you’re eligible.
USDA loan requirements
USDA loan eligibility requirements are based on the buyer and the property. First, the home must be in an eligible rural area, which USDA typically defines as a population of less than 20,000.
Second, the buyer must meet USDA monthly income caps. To be eligible, you can’t make more than 115% of the area median income. You also have to use the home as your primary residence (no vacation homes or investment properties are allowed).
Finally, borrowers have to meet the lender’s basic financial requirements, including:
- Income eligibility: Steady job and monthly income, proven by tax returns
- Credit requirements: FICO credit score of at least 640 (though this can vary by lender)
- Existing debt ratio: Debt-to-income ratio of 41% or less in most cases
To find out if the property you’re buying is in a USDA-eligible area, and whether or not you meet local income limits, you can use the USDA’s eligibility maps.
USDA loan rates
Compared to other home loan programs, USDA mortgage interest rates are some of the lowest available.
USDA rates are typically only matched by the VA loan, which is exclusively for veterans and service members. These two programs (USDA and VA) can offer below-market interest rates because their government guarantee protects lenders against loss.
Other mortgage programs, like the FHA loan and conventional loan, can have rates around 0.5%-0.75% higher than USDA rates on average. That said, mortgage rates are personal. Getting a USDA loan doesn’t necessarily mean your rate will be “below-market” or match the USDA loan rates advertised.
To get the lowest possible rate and monthly payments, you need an excellent credit score and a low debt-to-income ratio. Making a down payment can help, too, although the USDA doesn’t require one.
You also need to shop around with a few different USDA mortgage lenders. Each USDA lender sets rates differently — so comparing personalized offers from more than one company is the only way to find your lowest option.
How USDA loans work
USDA loans are insured by the U.S. Department of Agriculture. Thanks to this government guarantee, lenders can offer 100% financing and below-market interest rates without taking on too much risk.
Although the USDA backs this program, it typically isn’t the one lending money. Instead, private lenders are authorized to offer USDA loans. That means you can get a USDA mortgage from many mainstream banks, mortgage lenders, and credit unions.
The application process for a USDA mortgage works just like any other home loan. You’ll compare rates and choose a lender, complete an application (often online), provide financial documents, wait for the lender’s approval, and then set a closing day.
The only exception is for very-low-income borrowers, who may qualify for a USDA Direct home loan. In this case, you’d go straight to the Department of Agriculture to apply rather than to a private lender.
How are USDA loans different from FHA or conventional?
USDA loans have three important features that set them apart from other home loan programs:
- With a USDA loan, you don’t have to make a down payment. This is one of only two major loan programs that allow zero-down financing
- USDA is the only loan major program with geographic restrictions. You have to buy in a qualified “rural area” (though this includes many small towns and suburbs)
- The USDA loan program requires you to take a fixed-rate loan. Adjustable-rate mortgages are not available
Beyond that, the USDA loan isn’t all that different from other mortgage programs. The repayment schedule doesn’t feature a “balloon” or anything non-standard, the closing costs are ordinary, and prepayment penalties never apply.
Rural loans can be used by first-time home buyers and repeat home buyers alike. Homeowner counseling is not required to use the USDA program.
USDA loans require mortgage insurance (MI)
USDA guarantees its mortgage loans, meaning it offers protection to mortgage lenders in case borrowers default. But the program is partially self-funded. To keep this loan program running, the USDA charges homeowner-paid mortgage insurance premiums.
USDA charges both upfront and annual guarantee fees. The annual fee is broken into 12 installments and included in your regular mortgage payment. The upfront fee can be paid at closing, however, most home buyers roll it into the loan amount so they don’t have to add the fee to their closing costs.
USDA mortgage insurance rates
Current USDA mortgage insurance rates are as follows:
- Upfront fee: 1.00% upfront guarantee fee, based on the loan amount
- Annual fee: 0.35% annual guarantee fee, based on the remaining principal balance each year
As a real-life example: A home buyer with a $100,000 loan size would have a $1,000 upfront mortgage insurance cost, plus a monthly payment of $29.17 for the annual mortgage insurance. USDA upfront mortgage insurance is not paid in cash. It’s added to your loan balance for you, so you pay it over time.
USDA MI versus conventional PMI
USDA mortgage insurance rates are lower than those for conventional or FHA loans.
- FHA mortgage insurance premiums (MIP): 1.75% upfront mortgage insurance premium, and 0.85% in MIP annually
- Conventional loan private mortgage insurance (PMI): Premiums vary based on your DTI, credit scores, and additional factors, but they can reach above 1% annually
With USDA-guaranteed loans, mortgage insurance premiums are just a fraction of what you’d typically pay. Even better, USDA mortgage rates are often the lowest among FHA mortgage rates, VA mortgage rates, and conventional loan rates — especially when buyers are making a small or minimum down payment.
Lower rates mean lower mortgage payments each month, which is why USDA loans can be extremely affordable.
About the USDA Rural Housing Mortgage
The Rural Development loan’s full name is the USDA Single Family Housing Guaranteed Loan Program. However, the program is more commonly known as the “USDA loan.”
The Rural Development loan is sometimes called a “Section 502” loan. This refers to section 502(h) of the Housing Act of 1949, which makes the program possible. This program is designed to help single-family home buyers and stimulate growth in less-populated, “rural,” and low-income areas.
That might sound restrictive. But in fact, 97% of the U.S. map is eligible for USDA loans, including many suburban areas near major cities. Any area with a population of 20,000 or less (or 35,000 or less in special cases) can be an eligible rural area.
Yet most U.S. home buyers, even those who have USDA loan eligibility, haven’t heard of this program or instantly think “farmland.” This is because the USDA loan program wasn’t launched until the 1990s. Only recently has it been updated and adjusted to appeal to rural and suburban buyers nationwide.
Many USDA-approved lenders don’t even list the USDA loan on their loan application 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.
USDA home loan FAQ
USDA loans are special mortgages meant for low- to moderate-income home buyers. These loans are guaranteed by the United States Department of Agriculture. That guarantee acts as a form of insurance protecting USDA lenders, so they’re able to offer below-market interest rates and zero-down home loans. USDA runs this program to encourage homeownership for low-income families 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 be used to buy a home only in a rural or suburban area. Typically, qualifying areas have a population under 20,000.
The income limit for USDA home loans is based on your area’s median income. To be eligible for a USDA loan, you can’t exceed the median income by more than 15 percent. 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.
A USDA loan is a great option for buyers with moderate or low income. It lets you buy a house with no money 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-guaranteed loan. The main drawback is that USDA loans require mortgage insurance for the life of the loan. So if you can make a 20 percent 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 eligibility caps. FHA requires 3.5 percent down, but there are no location or income restrictions. FHA also has more lenient credit requirements: You need a 580 credit score for FHA versus 640 for USDA. The right loan type for you depends on where you’re buying and your financial situation.
USDA loans are not direct loans from the government. But they are backed by the U.S. Department of Agriculture, so they can offer zero down payment 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 preapproved and qualify for a USDA loan based on your income, credit, debt, and other factors.
USDA lenders have to send each loan file to the Department of Agriculture to be approved before underwriting. This can add around two to three weeks to your loan processing time.
Most mortgage lenders require a minimum credit score of 640 to qualify for the program.
The USDA has no down payment requirement. You can finance 100 percent of the home price with a USDA loan. However, if you do decide to make a down payment, you can lower your monthly mortgage payments and potentially afford a more expensive home.
USDA loan rates are often lower than conventional 30-year fixed mortgage rates. Plus, mortgage insurance rates are lower. This means a USDA loan is often more affordable overall than a comparable FHA or conventional loan.
Yes, USDA loans are eligible for refinance into another USDA loan or a conventional conforming loan. 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 home buying and rate-and-term refinances only.
The USDA Rural Development loan is meant to help moderate to low-income families get access to housing and mortgage loans in some of the less densely populated parts of the country. By enabling homeownership, the USDA helps 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 eligibility requirements of the agency, as do suburbs and exurbs of many major U.S. cities. About 97 percent of the United States landmass fits the USDA loan’s definition of rural. Only 3 percent is ineligible at the time of writing this article.
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. This includes a 1.00 percent upfront guarantee fee, which is added to your loan balance at closing, and an annual fee of 0.35 percent, which is broken into 12 installments and added to your monthly mortgage payments.
Yes, the USDA will let you finance your Upfront Mortgage Insurance payment by adding it to your loan amount. For example, if you bought a new home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $1,000. You could then increase your loan size to $101,000.
The USDA sets no loan limits, but the amount you can borrow is limited by your income and your household’s debt-to-income ratio. The USDA typically caps debt-to-income ratios to 41 percent. However, the program may be more lenient for borrowers with a credit score over 660 and stable employment, or who show a demonstrated ability to save.
No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers alike.
The U.S. Department of Agriculture’s website maintains a list of approved lenders for the Rural Housing Program.
The USDA Rural Housing loan is available as a 30-year fixed-rate mortgage only. There is no 15-year fixed option, or 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 to shop around to find the most suitable combination of low mortgage rates and low costs.
Yes, USDA mortgages require borrowers to escrow taxes and homeowners insurance with the lender. This means you’ll pay your taxes and insurance along with your mortgage each month. You may not pay your real estate taxes or annual homeowner insurance separately.
Yes, USDA loans allow gifts from family members and non-family members. Let your loan officer know as soon as possible that you’ll be using gifted funds, as this requires extra documentation and verification on the lender’s part.
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 two 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 two 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.
Yes, along with U.S. citizens, legal permanent residents of the United States can also apply for a USDA loan.
Yes, a borrower’s household income cannot exceed 115 percent of the area’s median income.
Today’s USDA mortgage rates
USDA mortgage interest rates are among the lowest on the market, next to VA loans. So in a high-rate environment, USDA loans can be particularly attractive to borrowers who are looking for their best deal.
Home buyers who qualify for USDA may be able to get a deal right now. To find out whether you qualify for a USDA loan — and what your rate is — check with a lender below.