USDA Loans
USDA Loan Basics
Similar to the VA and the FHA, the U.S. Department of Agriculture guarantees a government-backed mortgage option through its Rural Development program. These loans are tailored for those purchasing property in rural areas.
The government-backed USDA program offers many of the same benefits of a VA loan, including 100 percent financing and less stringent credit qualifications. Like VA loans, USDA loans are for the purchasing of primary residences. But these loans also have some limitations and challenges.
Here’s a closer look at USDA home loans:
No Down Payment
USDA loans allow qualified buyers to purchase with no down payment. Along with VA loans, USDA home loans are the only other $0 down mortgage option on the market.
Mortgage Insurance
Like FHA loans, USDA loans also have their own forms of mortgage insurance, both upfront and annual. The upfront fee is currently 1 percent of the loan amount in most cases. On a typical $250,000 loan, an upfront fee of $2,500 would be added to the loan balance.
In addition, the annual mortgage insurance charge is currently 0.35 percent of the loan balance. On that same $250,000 loan, the typical USDA borrower would begin with an annual fee of $883, or $73 per month.
Credit Requirements
As with the VA loan program, the USDA Rural Development program doesn’t set a credit score benchmark. Minimum credit score requirements will vary depending on the lender and other factors. A minimum 640 FICO score is a common cutoff.
Closing Costs
USDA buyers can seek to finance all of their closing costs up to 100 percent of the home’s appraised value. For example, if you’re purchasing a home at $150,000 and the closing costs are $5,000, you would need the home to appraise for at least $155,000 in order to finance those costs.
Similar to FHA loans, sellers in a USDA transaction can contribute up to 6 percent of the lessor of the purchase price or the appraised value toward a buyer’s closing costs and concessions.
USDA buyers can also use verified gift funds to cover closing costs. Acceptable sources include relatives, friends, charitable organizations, municipalities and more. Lenders will want to see a paper trail and have confidence this money is a genuine gift.
Geographical Restrictions
Your eligibility for a USDA loan is based in part on location. You’ll need to purchase a home in what the USDA deems a qualified rural area. A surprising portion of the country meets this designation, but you’ll want to consult your nearest Rural Development office for more details. The eligibility maps for USDA-backed loans can change on an annual basis. Generally, you wouldn’t be able to use a USDA loan to buy a home in or near most big cities.
Income Cap
USDA loans come with income caps that limit participation to borrowers at or below a particular income threshold. Currently, USDA borrowers can have an income of up to 115 percent of the area median income, adjusted for family size. Unlike FHA financing, there’s no maximum loan amount on USDA loans. Like most other mortgages, how much a borrower can obtain will depend on their income, debts and other factors.
Occupancy
USDA buyers will need to occupy the property as their primary residence. You couldn’t use this program to purchase a second home or an investment property.
Assumable
USDA loans are assumable. But most of these are “new rate and term assumptions,” meaning the person assuming the loan doesn’t get the same interest rate. Generally, the only time the interest rate and mortgage terms would stay the same is when a family member assumes the loan.
