What is a USDA mortgage loan?
USDA Loans or US Department of Agriculture Loans are offered on the purchase of properties located in rural areas of the country. USDA Loans (also known as “USDA Home Loans,” “Rural Housing Loans” or “Section 502 Loans”) are offered to eligible rural and suburban home buyers who are looking for a no-money down, 100 percent mortgage financing for their primary homes.
USDA loans are insured by the US Department of Agriculture and are best-known for their ‘no-money down’ financing feature. These are designed to help low to moderate income households purchase a home in a USDA-specified rural area. The USDA Home Loan Program offers 100 percent financing for all approved submittals, and besides VA Loans, it is the only loan program in the US that has no down payment.
Here's a quick rundown of our list:
- What are USDA Loans used for?
- What is the Maximum Amount You Can Borrow through a USDA Loan?
- Types of USDA Mortgage Loan Programs
- USDA Guaranteed Rural Housing Loans
- USDA Direct Rural Housing Loans
- Single-Family Housing Repair Loans and Grants
- Differences between Guaranteed USDA Loans and Direct USDA Loans
- Income Level
- Payment Assistance Subsidy
- Guarantee Fee
- Difference between USDA Loans and Conventional Loans
- Credit History
- Borrowing Limit against Home Value
- Income-to-Debt Ratio
- Loan Limits
- Who Can Apply for a USDA Loan?
- How to Qualify for a USDA Loan?
- Purchase a property that meets all criteria set by the program
- Exhibit good credit history to establish ability to meet credit obligations
- Meet the income limits set by the USDA
- Adjusted Income
- Pros and Cons of USDA Loans
- Getting Started
What are USDA Loans used for?
The USDA Home Loan Program provides financing for primary residences only and cannot be used for investment properties and vacation homes. This includes all single family homes, condominiums, and planned unit developments. Mobile homes and factory-built homes are not considered eligible for financing under this program.
In addition to this, homes with income-producing elements such as rental units, mother-in-law apartments, or large-scale farming areas are not allowed under this program. The USDA states that the home for which financing is required should be modest in cost, size, and design.
What is the Maximum Amount You Can Borrow through a USDA Loan?
There is no maximum loan limit set by the USDA. The principal amount is determined after evaluation of the applicant’s debt-to-income ratio, which gives the lender an idea of how much the lender can afford.
The maximum financing offered under the USDA Home Loan Program is 102 percent of the appraised value of the home for which financing is required. This includes 100 percent financing plus a 2 percent USDA Loan guarantee fee.
Types of USDA Mortgage Loan Programs
Currently, there are three types of USDA loans available to buyers.
USDA Guaranteed Rural Housing Loans
These are the most commonly issued USDA loans that allow you to get financial assistance from a third-party lender at a low interest rate even with zero down payments. However, no-money-down payment guaranteed USDA home loans require the borrower to pay a mortgage insurance premium.
All USDA Guaranteed Rural Housing Loans are offered at a fixed interest rate with a 30-year mortgage term.
USDA Direct Rural Housing Loans
These loans are issued directly by the USDA and are offered to applicants with low income or very low income. The USDA defines low income as having an income between 50 to 80 percent of the median income for the area where the buyer is looking to purchase a home. Very low income is defined as having an income that’s below 50 percent of the average median income for the respective geographic area.
USDA Direct Rural Housing Loans are offered at comparatively more flexible mortgage terms than Direct USDA Loans with mortgage terms extending over a period of 35 to 38 years usually.
Single-Family Housing Repair Loans and Grants
Under this program, the USDA provides financial assistant to very-low income or elderly homeowners to help them repair and modernize their homes and eliminate health and safety risks.
Usually, financial assistance is provided in the form of a package that combines a loan or grant of up to $27,500.
Differences between Guaranteed USDA Loans and Direct USDA Loans
Direct loans are aimed at providing financial support to very-low income buyers who would otherwise won’t qualify for a conventional or FHA loan. On the other hand, guaranteed loans are intended for buyers with a moderate income level.
The income level for guaranteed loans is capped at 115 percent of the median income of the respective area, while for direct loan borrowers, it’s capped at 50 to 80 percent.
In the case of a guaranteed loan, the loan amount is provided by a third-party lender but guaranteed by the USDA. The US government acts as the lender of a direct loan.
Payment Assistance Subsidy
In the case of direct loans, the borrower may get a payment assistance subsidy to reduce the interest charged on the loan amount to as low as 1 percent. The availability of payment assistance subsidy depends on the borrower’s income level in case of a direct loan and is not available for the guaranteed USDA loan program.
Guaranteed loan borrowers are required to pay a 2 percent guarantee fee which can also be financed into the principal loan amount. In the case of direct loans, the borrower is not required to pay any such fee.
Difference between USDA Loans and Conventional Loans
USDA home loans offer many benefits that are not a part of other conventional loan programs.
One of the distinct advantages of USDA loans over conventional loans is that borrowers with less-than-perfect credit may also qualify for a USDA loan.
Borrowing Limit against Home Value
Unlike conventional loans, USDA loans provide up to 100 percent financing.
Borrowers with high-to-debt income ratio can also apply for a USDA loan and qualify successfully. While for conventional loans, a low debt-to-income ratio is required and no relaxations are provided by the lender.
There are no loan limits under USDA home loan program. On the contrary, maximum conventional loan limit in most areas is $417,000.
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Who Can Apply for a USDA Loan?
In order to apply for a USDA loan, an applicant must:
- Be a US citizen, a US non-citizen national, or a qualified alien
- Agree to occupy the housing unit as their primary residence
- Have not been suspended from participation in federal programs
- Demonstrate the willingness to pay monthly payments in a timely manner
- Meet other eligibility requirements of the loan program
How to Qualify for a USDA Loan?
In order to qualify for this loan program, an applicant should fulfill the following three requirements.
Purchase a property that meets all criteria set by the program
The property under question should be located in a USDA-specified rural area. The USDA’s definition of a rural area is quite liberal. Therefore, one must first check the eligibility of the property on the USDA website.
Exhibit good credit history to establish ability to meet credit obligations
In order to obtain a USDA loan, the candidate must establish their willingness and ability to fulfill their new credit obligations with a good credit history. Here are some indicators of an unacceptable credit history according to the USDA.
- Two or more than two 30-day late payments within the past 12 months.
- More than one 30-day late rent payments within the past 36 months.
- Outstanding collection accounts without any payment arrangements.
- Outstanding judgments in the past 12 months.
- Accounts converted to collections within the past 12 months.
- Delinquent federal debt or tax liens without any payment arrangements.
- Foreclosure or bankruptcy discharged less than 3 years ago.
Meet the income limits set by the USDA
The USDA mentions the following income-related requirements on its official website.
- The applicant must have an adequate and consistent source of income, typically with a history of at least 2 years.
- Self-employed borrowers are required to exhibit a 2-year income history with 1040’s.
- Part-time employment should have a history of no less than one year.
In addition to this, the USDA evaluates and determines the eligibility of a candidate’s income in two ways:
This includes all kinds of income received by the applicant and co-applicant, such as salary, bonus, overtime, child support, alimony, etc. Eligibility income is used to calculate qualifying ratios, which should be no greater than 29/41. However, USDA may consider candidates with higher ratios, provided they exhibit other strong compensating factors, including very good credit scores, ability to save, consistent employment history, and the potential for increased income.
In order to qualify for a USDA loan, an applicant must meet the USDA-adjusted annual household income limits, which specify that the applicant’s annual household income should not exceed 115 percent of the median household income for the area where the property is located.
The USDA deducts specific portions of income in the calculation of adjustable income for each minor child, handicapped or disabled individual, and full-time students who are a part of the applicant’s household. In addition to this, the USDA also allows deductions for child care expenses and medical expenses of elderly members of the household.
Pros and Cons of USDA Loans
- Government-guaranteed loans
- Zero down payments
- 100 percent financing
- Low monthly mortgage insurance
- 30 years fixed interest rates
- No pre-payment penalty
- Flexible credit requirements
- Upfront guarantee fee of 2 percent
- Strict income limitations
- Strict qualifying ratios requirements
- Financing available for rural areas only
- 2015 Interest Rates for USDA Loans
Okay, so you've read this far and are intrigued.
Maybe you want a little bit more information.
You might be in a position where you want to buy your next house or condo, lower your bills, or take cash out.
What should you do next?
My suggestion – contact me.
Why not get started now?
Your USDA Mortgage Insider,