USDA Mortgage Loans
What is an USDA Loan?
A USDA home loan is a competitively priced mortgage option that helps to make purchasing a home more affordable for low-income individuals living in designated rural areas. The U.S. Department of Agriculture backs USDA loans in the same way the Department of Veterans Affairs backs VA loans for eligible individuals such as veterans and their families.
This government backing means compared to conventional loans, mortgage lenders can offer lower interest rates in many cases. If you qualify, you can buy a home with no down payment, although you’ll still need to pay closing costs.
USDA Loan Requirements
Property Location
Homes financed by USDA loans must be in eligible rural or edge of suburbia areas. You can see if a home is eligible by visiting the USDA’s eligibility site.
You’ll need the home’s address; after you accept the disclaimer, select the Single Family Housing Guaranteed option (don’t choose Single Family Housing Direct; that’s a different kind of loan). Then just type in the address.
Household Income
USDA loans are for families who demonstrate economic need, so your adjusted gross income can’t be more than 115% of the median income in the area. You can find out if your income is eligible in the same place you check property eligibility. Just follow the same link and instructions, except choose Income Eligibility from the menu.
In addition, to qualify you must show that you have a stable income and can make your mortgage payments without incident for at least 12 months based on your assets, savings and current income.
Your mortgage lender will also look at your debt-to-income (DTI) ratio when they consider you for a USDA loan. To give yourself the best chance of qualification, we generally recommend DTI of 43% or lower.
Down Payment
USDA loans offer 100% financing meaning if you qualify you would not be required to put anything down on your mortgage.
Guarantee Fee
All USDA loans come with upfront and annual guarantee fees. The annual fee is added to your monthly payment and lasts for the life of the loan.
Guarantee fees function as the equivalent of mortgage insurance on a USDA loan, which goes toward funding the USDA loan program. The good thing is that the USDA guarantee fees are much lower than FHA fees on both an annual and upfront basis.
Types of USDA Loans
- USDA Purchase
- USDA Rate/Term Refinance