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USDA Home Loan Guide and USDA Home Loan Requirements

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
  • Important USDA Home Loan Considerations
  • Pros Cons
    • 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
    • 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
  • 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:

    • USDA Guaranteed Loan Program: The most common type of USDA home loan, the Guaranteed Loan Program allows borrowers with low-to-moderate incomes to obtain mortgages through USDA-approved private sector lenders that are 90% guaranteed by the USDA / U.S. government. The USDA Guaranteed Loan Program offers borrowers 15 or 30 year fixed rate mortgages.
    • USDA Direct Loan Program (Section 502 Program): For low and very low income individuals, the Direct Loan Program offers mortgage payment assistance to help borrowers make their mortgage payments for a specified period of time. Participants in the Direct Loan Program borrow money directly from the USDA and, including the payment assistance, can pay interest rates as low as 1%, depending on financial need. Additionally, the Direct Loan Program offers mortgage terms of 33 or 38 years depending on the borrower’s ability to afford his or her monthly mortgage payment -- the longer the mortgage term the lower the monthly payment. The USDA Direct Loan Program is for borrowers who are not able to arrange mortgage financing through other means. When borrower sell or move out of the property they are required to repay the payment assistance received over the life of the mortgage.
  • 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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  • USDA Home Loan Property Eligibility
  • The property being mortgaged must meet the USDA Home Loan Program eligibility requirements including the following:

    • The property must be located within a USDA-designated rural area or small community.  In many cases these areas are located relatively close to major cities.  95% of the land in the U.S. representing a population of over 100 million people is considered USDA rural area.  You can use the  USDA's Property Eligibility Tool to determine if a property is located in a USDA-designated rural area.
    • The property must be in good condition.  An appraiser will review the property to determine its fair market value and verify that the it meets minimum quality standards.  The property must be the borrower’s primary residence. Vacation homes and rental properties are not eligible for the USDA Home Loan Program.  The property can be a new or existing residence.
    • The property must be a single-family residence such as a home, condominium, townhouse or modular home.  Multifamily properties are not eligible for the USDA Home Loan Program.  If you are buying a condominium, the condo project must be approved by HUD, the VA or Fannie Mae.

    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:

    • Be a U.S. citizen or a qualified non-citizen and be eligible to participate in programs offered by the federal government.
    • Show a track-record or willingness to pay bills on time.
    • No bankruptcy or foreclosure in the past three years and no delinquent accounts or accounts in collection.

    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).

  • CalculatorUse our USDA HOME LOAN QUALIFICATION CALCULATOR to learn what size USDA home loan you can afford
  • 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 660), stable employment and income history (two-plus years), 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.  For example, the guaranteed loan program income limit for a family of four in Des Moines, IA is $86,850.  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:

    • Upfront USDA mortgage insurance guarantee fee
      • First, we calculate the total mortgage amount including the the upfront USDA mortgage insurance fee:
      • $100,000 (mortgage amount before USDA mortgage insurance) + $1,000 (upfront USDA mortgage insurance) = $101,000 total mortgage amount
      • $101,000 (total mortgage amount) * 1.00% (upfront USDA mortgage insurance fee) = $1,010 (upfront USDA mortgage insurance fee)
    • Ongoing USDA mortgage insurance guarantee fee
      • $101,000 (total mortgage amount) * .35% (ongoing annual USDA mortgage insurance fee) = $354 (ongoing USDA mortgage insurance fee) / 12 months = $29.46 (monthly USDA mortgage insurance fee)

    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.

  • CalculatorUse our CONFORMING MORTGAGE LIMIT CALCULATOR to determine the loan limit for your county
  • 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.

  • Great Mortgage IdeaRelated FREEandCLEAR Resources

  • Sources

    USDA Home Loan Program Guaranteed Program Guidelines: https://www.rd.usda.gov/publications/regulations-guidelines/handbooks#hb13555

    USDA Program Property Eligibility Map: https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

    USDA Program Borrower Income Limits: https://eligibility.sc.egov.usda.gov/eligibility/incomeEligibilityAction.do?pageAction=state

    USDA Guarantee and Mortgage Insurance Fees: https://www.rd.usda.gov/files/RD-SFH-UpfrontFee1.pdf

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. More about Harry

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