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USDA Home Loan Guide and USDA Home Loan Requirements
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USDA Home Loan Guide and USDA Home Loan Requirements

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience
USDA Home Loan Program Overview

The U.S. Department of Agriculture (USDA) Home Loan Program is designed to help individuals with low-to-moderate incomes buy homes located in rural areas or small communities with no down payment.  The program allows qualified borrowers to use a USDA home loan to purchase eligible properties located in USDA-designated rural areas.  You do not need to be a first-time home buyer but the USDA Home Loan Program works well for individuals buying their first home.

The USDA insures the mortgage which basically guarantees that the lender will recover the full loan amount in the event of foreclosure.  Because the loans are guaranteed by the government, USDA mortgage rates are lower than the rates for conventional low down payment programs.  To help offset the cost of the USDA guarantee, borrowers are required to pay upfront (1.00% of mortgage amount) and ongoing (0.35% of mortgage amount) USDA mortgage insurance fees, which are also called guarantee fees.

There are two types of USDA Home Loan Programs:

Important USDA Home Loan Considerations
Pros
  • Ability to buy a home with no down payment
  • Typically lower mortgage rates than FHA or conventional mortgage programs
  • Lower ongoing mortgage insurance than FHA or conventional loan programs
  • No loan limits
Cons
  • Property must be located in a USDA-designated rural area
  • Stricter borrower qualification requirements (lower debt-to-income ratio, higher credit score)
  • Borrower income limits
  • Borrower is required to pay upfront and ongoing USDA mortgage insurance
How a USDA Home Loan Works

Mortgages through the USDA Guaranteed Loan Program are provided by USDA-approved private sector lenders such as banks, mortgage banks and mortgage brokers.  The USDA does not endorse any particular lenders but offers a list of approved lenders as well as a list of USDA Guaranteed Loan Program local contacts on their web site.  Mortgages for the USDA Direct Loan Program are provided directly by the USDA instead of a bank or other private sector mortgage lender. In many cases borrowers work with a local housing agency or other non-profit housing organization to apply for the USDA Direct Loan Program.  To learn more about and to apply for the USDA Direct Loan Program contact your USDA State Office.

We recommend that you compare terms including the interest rate, fees and monthly payment for a USDA home loan to the terms for other no or low down payment programs.  Contact multiple lenders in the table below to learn about the programs they offer and request loan proposals.  Shopping multiple lenders enables you to find the mortgage and program that best meet your needs.

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Current Mortgage Rates in Richmond, Virginia as of October 21, 2020
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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.
USDA Home Loan Property Eligibility

The property being mortgaged must meet the USDA Home Loan Program eligibility requirements including the following:

One unique feature of the program is that a USDA Home Loan can be used to purchase land and build a home.  So you can use one USDA loan to both buy a plot of land and finance the construction of a new home.  You may be required to make a down payment if you use the program to build a home, as compared to buying an existing home which requires no down payment.  Additionally, both the property location and home must meet program eligibility requirements.  Plus, you are required to work with a licensed contractor and submit your building plans when you apply for the mortgage. 

For the USDA Direct Loan Program, additional property eligibility requirements include: the property size generally cannot exceed 1,800 square feet and the property cannot have in-ground swimming pool.

USDA Home Loan Borrower Eligibility

In order to qualify for the USDA Home Loan Program, the borrower must meet certain eligibility requirements including the following:

Use our free mortgage quote form to compare no obligation loan quotes from top-rated lenders near you. Our personalized quote form is easy-to-use, requires minimal personal information and does not affect your credit. Comparing multiple loan quotes enables you to find the best mortgage terms for a USDA home loan.

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USDA Home Loan Requirements

We review the key USDA Home Loan borrower qualification requirements below.

Credit Score

The USDA Home Loan Program typically requires that the borrower have a minimum credit score of 640 although there are some cases where borrowers can qualify for a USDA loan with a lower score. It may also be possible to qualify for a USDA Home Loan without a credit score although it requires extra effort from the applicant and lender. USDA Home Loan applicants without a credit score may qualify by providing multiple items that establish their credit history such as a rental payment history, utility or phone bill payments, insurance payments or an on-time payment history for other recurring bills.

USDA Home Loan applicants with credit scores below 640 or no credit scores are subject to manual underwriting instead of automated underwriting process that applies to borrowers with credit scores of 640 or higher. In short, manual underwriting requires more documentation and effort by the lender to submit your loan application as compared to the USDA's automated underwriting process. Not all lenders are willing to do manual underwriting because of the additional work required so be sure to confirm with your lender upfront that they do manual underwriting for USDA Home Loans.  We also recommend that you review your credit score six months to a year before you start the mortgage process to address potential issues.

Borrower Debt-to-Income Ratio

USDA guidelines typically allow a borrower to spend a maximum of 29% of their monthly gross income on their mortgage payment and other housing-related expenses. This is known as the front end debt-to-income ratio, or the maximum percentage of a borrower's monthly gross income that can be spent on total monthly housing expense, which includes your mortgage payment, property tax, homeowners insurance, USDA insurance and other housing-related expenses. For example, if a borrower makes $4,000 per month in gross income, the borrower can spend $1,160 per month on his or her mortgage payment plus property tax, homeowners insurance, USDA mortgage insurance fees and other applicable housing-related expenses ($4,000 * .29 = $1,160).

USDA loan requirements typically allow borrowers to spend a maximum of 41% of their monthly gross income on total monthly housing expense plus all other monthly debt expenses including credit card, auto and student loan payments.  This is known as a back end debt-to-income ratio.  For example, if a borrower makes $4,000 per month in gross income, the borrower can spend $1,640 per month on his or her total monthly housing expense plus all other debt payments ($4,000 * .41 = $1,640).  The lower borrowers' monthly debt payments, the more they can spend on their mortgage payment and total housing expense, which enables them to qualify for a larger mortgage.  The USDA allows higher debt-to-income ratios in cases where borrowers have higher credit scores (above 680), stable employment and income history (at least two years), significant financial reserves, potential for increased earnings and the ability to save money.

USDA Home Loan Borrower Income Limits

The borrower’s adjusted gross income cannot exceed the maximum USDA adjusted gross income limit for the county in which the property is located.  Income from all household members must be included in calculating the borrower’s adjusted gross income.  The borrower’s gross income can be adjusted, or reduced, by certain deductions such as if a child, full-time student, disabled person or elderly person reside in the household, plus certain medical expenses for children or elderly household members can also be deducted to reduce the borrower’s adjusted gross income.  When applying for a USDA home loan in some cases it is better for the borrower to have a lower adjusted gross income so that the borrower does not exceed the income limit.  USDA income limits vary by the number of people in the borrower’s household, with the more people in a household, the higher the limit.

The income limit for the USDA Guaranteed Loan Program is typically 115% of the median household income for the area.  Because median household income changes by geography, there are different limits for different areas.  You can review the USDA Guaranteed Loan Program income limits on the USDA web site.

The adjusted gross income limit for the USDA Direct Loan Program is much lower and is typically 50% - 80% of the median household income for the area.  For example, the direct loan program income limit for a family of four in Des Moines, IA is $65,900.  You can review the USDA Direct Loan Program income limits on the USDA web site.

First-Time and Repeat Home Buyers

The USDA Home Loan Program is available to both first-time and repeat home buyers as compared to other no or low down payment programs that are only available to first-time buyers.

Borrower Financial Reserves Requirement

Unlike other mortgage programs, USDA Home Loans do not require borrowers reserves although we recommend that you hold enough savings in reserve to cover three-to-six months of total monthly housing expense.  So if your total monthly housing expense is $2,000, we recommend that you hold at least $6,000 in reserves at the time your mortgage closes.

Home Buyer Counseling

Unlike other no or low down payment mortgage programs, the USDA Home Loan Program does not require applicants to complete a home buyer counseling class.

Program Costs and Fees

Mortgage Rate

The mortgage rate you pay on a USDA home loan depends on several factors including your credit score.  Borrowers with higher credit scores receive the program’s best mortgage rate while borrowers with lower credit scores pay higher rates. For borrowers with good credit scores, the mortgage rate for a USDA home loan is typically .125% - .500% lower than the rate for other conventional low down payment programs and slightly lower than interest rate for a FHA mortgage.  USDA mortgage rates are among the lowest of all programs.  The mortgage rate for USDA loans is lower because the program is backed by a government agency and borrowers pay mortgage insurance fees.  Borrowers should shop lenders to find the USDA home loan with the lowest interest rate and fees.

Closing Costs

Unlike with conventional mortgages and the FHA and VA programs, borrowers can include closing costs in their mortgage amount for a USDA home purchase loan.  As long as the property appraises for more than the purchase price you can add closing costs such as lender, appraiser, title company and settlement agent fees to your loan amount, up to the appraised value of the property.  Additionally, the upfront USDA guarantee fee can also be added to your loan amount and financed though your mortgage.  The ability to finance part or all of your closing costs is unique to the USDA Home Loan program and reduces the amount of cash borrowers need to contribute upfront to buy a home.   

Extra Fees

Borrowers are required to pay standard lender fees and closing costs with a USDA Home Loan. Aside from the upfront guarantee insurance fee, borrowers are not required to pay additional fees to apply for the program.

Impound Account

Along with their mortgage payment, the USDA Home Loan Program requires borrowers to pay property tax, homeowners insurance and ongoing insurance guarantee fees into an impound account on a monthly basis. An impound account is a trust account controlled by the lender from which expenses such as taxes and insurance are paid when due. The impound account does not affect the amount of fees the borrower is required to pay for the mortgage.

Use the FREEandCLEAR Lender Directory to find top-rated lenders that offer USDA home loans and numerous other no and low down payment mortgage programs.

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USDA Guarantee Fees / Mortgage Insurance Fees 

The USDA Home Loan Program requires that borrowers pay upfront and ongoing mortgage insurance fees, also called USDA guarantee fees.  The mortgage insurance fees protect lenders against losses that result from defaults on USDA mortgages.  The upfront USDA mortgage insurance fee equals 1.00% of the mortgage amount and the ongoing fee equals 0.35% of the loan amount.  The borrower can add the upfront fee to the loan amount.  Similar to private mortgage insurance (PMI) for conventional mortgages and mortgage insurance premium (MIP) for FHA mortgages, the ongoing USDA mortgage insurance fee is an additional cost to the borrower on top of your monthly mortgage payment. The ongoing fee for a USDA home loan is less expensive than PMI or FHA MIP and declines a little every year as your mortgage balance decreases.

The example below outlines the upfront and ongoing USDA mortgage insurance fees for a $100,000 mortgage:

As of October 1, 2016, the upfront USDA mortgage insurance fee is reduced to 1.0% of the mortgage amount and the ongoing insurance fee is 0.35% of the loan amount.

Mortgage Type and Loan Amount

Mortgage Program

15 and 30 year fixed rate mortgages are permitted under the USDA Home Loan Program guidelines.  33 and 38 year fixed rate mortgages are permitted under the USDA Direct Loan Program.  For manufactured homes only 30 year fixed rate mortgages are permitted.  Adjustable rate mortgages (ARMs) and interest only mortgages are not allowed.

Maximum Loan-to-Value (LTV) Ratio

According to USDA Home Loan requirements, borrowers can finance 100% of the appraised property value plus the upfront USDA guarantee fee (1.00% of the mortgage amount).  So in total, the borrower’s mortgage amount can be up to 102% of the appraised property value for a maximum loan-to-value (LTV) ratio of 102%. The LTV ratio equals the mortgage amount divided by the property value. The borrower can also finance closing costs such as lender, title, escrow, attorney and appraisal fees as long as the LTV ratio does not exceed 102%. For the borrower to include closing costs in the mortgage amount, the appraised property value must be greater than the contracted price at which the buyer has agreed to purchase the property.

Loan Limit

There are no loan limits for the USDA Guaranteed Loan Program although USDA borrower income limits effectively cap the mortgage amount you can obtain through the program.  With the USDA Direct Loan Program, in addition to applying income limits, the mortgage amount must be lower than the conforming loan limit for the county in which the property is located.

Mortgage Type

The USDA Home Loan Program applies to both home purchase mortgages as well as refinancings of USDA loans.  Borrowers with existing USDA loans can use the USDA Streamline Refinance Program to refinance their mortgage with less documentation and borrower qualification requirements including no income, assets or credit score verification, no maximum debt-to-income ratio and no appraisal report.

Related FREEandCLEAR Resources


Sources

"Single Family Housing Guaranteed Loan Program."  USDA Rural Development.  U.S. Department of Agriculture, 2020.  Web.

"Single Family Housing Guaranteed Loan Program Technical Handbook."  USDA Rural Development.  U.S. Department of Agriculture, 2020.  Web.

"440.1 (1810-A) Interest Rates, Amortization, Guarantee Fee, Annual Charge, And Fixed Period."  RD Instruction 440.1.  U.S. Department of Agriculture, 2020.  Web.

"Single Family Housing Income Eligibility."  Single Family Housing Guaranteed.  U.S. Department of Agriculture, 2020.  Web.

"Property Eligibility."  Single Family Housing Guaranteed.  U.S. Department of Agriculture, 2020.  Web.

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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