USDA Home Loans

USDA mortgages are home loans insured by the U.S. Department of Agriculture and designed to help people with low and moderate incomes buy homes in rural areas. Although you may not consider your location rural, the USDA’s definition of rural is broad, and even includes some suburban areas. You and the property you want may qualify for a USDA loan.

The USDA offers several mortgage loan programs that vary slightly in their qualification details. You may qualify for one USDA Section 502 loan, but not another, so it pays to learn about the two most popular USDA mortgage loans.

How USDA Loans Work

The most popular USDA loan is the Section 502 Guaranteed Rural Housing Loan. Like FHA and VA loans, these loans are backed by the government via a mortgage insurance plan. Should you ever default, lenders rely on the USDA insurance to cover 90 percent of their losses. Because these 30-year, fixed-rate loans are government-backed, lenders are encouraged to make loans to borrowers they might otherwise turn down. Participating lenders, such as national and local banks, complete the processing and funding of USDA guaranteed loans.

Guaranteed Rural Housing Loan Homeownership Direct Loan
Income eligibility limits Yes, adjusted for area Yes, adjusted for area
Property location restrictions Yes, USDA-designated rural area Yes, USDA-designated rural area
Type of program Government loan guarantee Government direct loan
Who lends the money Private lenders The USDA
Term 30 years 33 or 38 years
Grant money available No Yes

The USDA requires guaranteed loan borrowers to pay for mortgage insurance. At closing, you pay 2 percent of the purchase price as an upfront fee. You also pay a monthly mortgage insurance premium of 0.40 percent of the loan’s balance each year. Because your loan balance decreases every year, your monthly insurance payment will drop a bit each year.

The other popular USDA Section 502 loan is the Homeownership Direct Loan. With a direct loan, the USDA funds the loan itself through local USDA Rural Development offices. These loans are designed to help rural residents who have a moderate or below-average household incomes. Direct loans can be 33 or 38 years in length. The USDA offers assistance grants on direct loans to reduce the monthly payments to an effective interest rate as low as 1 percent. These grants depend on your household’s income.

USDA Lenders In Your Area

Enter your property’s zip code to find the USDA lenders and Rural Development office in your area.

Lenders Near You Telephone number Distance
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Lender Name No.2 (xxx) yyy-zzzzz aa
Lender Name No.3 (xxx) yyy-zzzzz aa
Lender Name No.4 (xxx) yyy-zzzzz aa
Lender Name No.5 (xxx) yyy-zzzzz aa
Lender Name No.6 (xxx) yyy-zzzzz aa
Lender Name No.7 (xxx) yyy-zzzzz aa
Lender Name No.8 (xxx) yyy-zzzzz aa
Lender Name No.9 (xxx) yyy-zzzzz aa
USDA Rural Development
Office for Zip Code xxxxx
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    Zip code
  • telephone(123) 456-7890
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Pros & Cons of USDA Loans

pros

Zero Down Payment

Borrowers do not need to come to the table with a down payment. This makes a USDA mortgage a good option for people who can’t afford an FHA loan, which requires a 3.5 percent down payment.

Low Credit Score OK

The USDA does not require borrowers to have a minimum FICO credit score. However, USDA lenders don’t hand out mortgages to anyone who shows up at their offices. Lenders will review your FICO score, and some have their own credit score standards you must meet to qualify for a USDA guaranteed or direct loan. Lenders’ credit score standards are called overlays.

Flawed Credit History OK

A bruised credit history may not be a deal-killer for USDA loans. The USDA’s underwriting process is flexible. The USDA uses its Guaranteed Underwriting System to determine eligibility and if the borrower pre-qualifies. If the USDA’s automated process denies the application, the loan can still be manually underwritten, where a human underwriter takes a closer look at whether the applicant has established a solid payment history with things like utilities or rent, or if there is a low debt-to-income ratio.

Flexible Loan Limits

The USDA places upper loan limits based on household income and debt-to-income ratios. Depending on your circumstances, financing can go as high as $400,000

Streamline Refinance Available

In 2012, the USDA launched its streamline refinance loan program to speed up the entire processing time. Streamline refinances are generally completed three weeks from the time an application is submitted. The program doesn’t require any credit reports, home appraisal or property inspections, and it accepts all credit scores regardless of how low they are. In addition, homeowners who owe more than their homes are worth are also eligible to use this refinance program.

Low-Cost Loan Origination Fee

The USDA’s upfront guarantee fee is 2 percent of the total loan amount. For a $150,000 loan, for instance, the fee would be $3,000. It’s a sizable amount, but it can be rolled into the mortgage instead of paid for out of pocket. In this example, the mortgage would then be for $153,000.

Great Rates

Rates for USDA loans are generally lower than comparable, 30-year fixed-rate mortgages. Even if you have less-than-stellar credit, you may still get a lower rate with a USDA loan because of the agency promises to reimburse the lender should you default and allow a foreclosure.

Cons

Not All Houses Are Eligible

Homes must be located in a USDA-defined rural area. The USDA defines rural broadly, but there are restrictions. Homes that have additional units used for commercial purposes would likely be ineligible. Vacation and investment homes are also not eligible. And if a house has an in-ground swimming pool, its value will be deducted from the total home’s price, making it ineligible for 100 percent financing. Manufactured homes are allowed, but they must be new and installed permanently. Research restrictions before you begin the process.

Applicant Income Restrictions Apply

You can earn too much to qualify for a USDA loan. The limits vary county by county. The limits are low for direct loans, and significantly higher for USDA guaranteed loans. Consult with a loan officer experienced in USDA loans to learn if you qualify.

Refinance Restrictions on USDA Loans

The home being refinanced must be a primary residence. The borrower must have a record of 12 consecutive, on-time mortgage payments.

30-Year Terms Only On USDA Streamline Refis

The USDA’s streamline refinance program only applies to mortgages with 30-year terms. Borrowers with 15-year or 20-year loans, this would immediately take them out of USDA refi eligibility. You may qualify for a non-USDA refinance.

USDA Streamline Refi Not Available In All States

The streamline refinance program is available in approximately 34 states, so check with your local USDA rural development office to learn your USDA refinance options.

Primary Residence Only

Borrowers can only use USDA loans for a primary residence, which is defined as the house that is lived in on a regular basis. Vacation homes, farms and other homes that do not meet this definition are ineligible for the loan.

Fewer Lenders

The USDA restricts the types of lenders approved to offer loans. See the USDA lender map on this page to find a USDA lender in your area.

No Cash-Out Refinances

A cash-out refinance is when a mortgage is refinanced so that the new mortgage amount is greater than the existing mortgage amount. Borrowers tend to go this route when they are trying to access equity built up in the home. The USDA does not offer cash-out refinances. Loans are for rate and term refinances and purchases only.

Must Pay Fee For USDA Guarantee Loan

Borrowers are required to pay a fee for a USDA guaranteed loan or have the USDA fee rolled into the loan (see Low-Cost Loan Origination Fee in the Pros section above). The fees tend to be lower than those on traditional mortgages but depending on the amount of the loan, the USDA upfront guarantee fee can be several thousand dollars.

78% percent of USDA loans made to home buyers
who were not low-income
Average Direct Loan $124,300
Average Guaranteed Loan $135,700
Source: USDA, 2014

Applying for a USDA Loan

As a potential borrower, you will need to know that you and the property you want to buy are eligible for a USDA loan. Some of these conditions are unique to USDA loans, but most are common mortgage lending standards. For example, you need to show at least two years of consistent employment (or income) and a steady stream of on-time debt payments. Also, depending on the state, existing homeowners may not be eligible to participate in the USDA Streamline refinance program.

Find USDA-Approved Lenders

Because the USDA restricts the types of lenders that can offer the agency’s loans, borrowers will need to do their homework to find an approved lender. The search for a USDA guaranteed loan lender can start here. Go to your local Rural Development office if you believe you qualify for a USDA direct loan.

Get Your Paperwork

Include with your application a proof of income, federal income tax returns for the last two years, and other financial asset information. Once the lender has all necessary documentation, expect a credit check and a computation of your debt-to-income ratio. These steps will help determine if you qualify for a USDA loan, and if you do, the maximum amount you are eligible to borrow.

What If I Don’t Qualify For a USDA Loan?

Both USDA guaranteed and FHA loans are similar. Typically, FHA loan costs are higher than USDA guaranteed loan costs. Each requires an upfront fee that can be rolled into the loan balance. Both require monthly mortgage insurance premium payments, though the USDA’s is less as of this writing, and decreases with the loan balance. If you do not qualify for a USDA loan, consider an FHA loan.

USDA Loans Questions and Answers

Is an USDA loan really the best option for a first-time homebuyer?

It might be because the loans don’t require a down payment, and the USDA loan can be rolled into the loan rather than having to be paid upfront out of pocket. The same is true for closing costs. Plus, first-time homebuyers with scant or even damaged credit histories may still be eligible for USDA loans.

Are USDA loans cheaper?

From zero-down payments to little to any upfront costs, USDA loans tend to be cheaper than FHA and conventional mortgages. Borrowers can also get 100 percent financing and mortgage insurance premiums and closing costs can be rolled into the loan. Unlike with typical mortgages, grants and gift funds from family members can be used to help defray loan costs as well.

How do I know if an USDA loan is for me?

The USDA program expands eligibility to those who may have low credit scores or poor credit histories but can show they have worked diligently for a certain time. From the single mother who has a low-wage job but has worked consistently for years, to the first-time homebuyer who may not have enough money for a down payment, a USDA loan may be a good choice. A USDA loans make home ownership an option for those who believe their financial circumstances would automatically rule them out for approval on another loan type.

How hard is it to qualify for an USDA loan?

The main qualifier is the home must be in a rural area. That definition is rather broad and can include properties near cities and suburbs. It must be your primary residence. The applicant does not need a high FICO credit score, although many lenders want to see 620 or higher. Debt-to-income ratio and overall income will be looked at to ensure that loan payments can be paid. And, if you’re 18 years or older, a U.S. citizen, national or qualified alien, you’ve already met two of the qualifying requirements.

How long does it take to close on a USDA loan?

USDA loans typically take 35 to 40 days to close. The closing process starts after the homebuyer is determined eligible for the loan and a contract is signed. The lender will arrange an appraisal of the home, gather the title information and determine how the borrower will pay the 2 percent USDA fee. After the underwriting and loan approval is completed, the file is sent to a USDA office for the final commitment. The lender and title agent will then meet to draw up the closing documents. Keep in mind snags can happen at any step, delaying the entire process.

Is it harder to buy a house if I’m using an USDA loan?

That depends on your circumstances. Your household income must be less than the USDA threshold for the type of USDA loan you seek; the property must be in a USDA-defined rural area; you must meet the USDA’s credit and DTI ratio rules. The first two rules might knock you out of the running for a USDA loan immediately. Otherwise, buying a house with a USDA loan may be less difficult than FHA or conventional loans because the USDA does not require a down payment.

Is a USDA loan expensive long-term?

The answer to this question depends on your circumstances. USDA annual insurance expense is not high, and USDA interest rates tend to be low. As a result, the effective interest rate for a conventional loan in comparison to a USDA loan might be very close. Compared to a FHA loan, a USDA loan is a bargain.

Where do I get started if I want to get an USDA loan?

If your household income is low in comparison to others in your area, consider a USDA direct loan. Otherwise, shop several local USDA lenders to learn if the home you wish to purchase is located in an area eligible for a USDA loan, if your household income is less than the USDA maximums, and the rates the lenders are offering.

Can I qualify for an USDA loan with bad credit?

Yes. The USDA is most interested in knowing the borrower has the ability to repay the loan. So, if your FICO credit score is less than stellar, say under 600, lenders will look for compensating factors such as two years of steady employment and three years of on-time payments on other debt, and if you can make a down payment.

Who should consider getting an USDA loan?

USDA loans are a good option for many borrowers, including those who don’t have enough money for a down payment, consumers with low credit scores or spotty credit histories, first-time home buyers, people on fixed incomes, or those who are tired of paying rent and want to own their house.

What is a ‘rural area’ under USDA rules?

Rural means the property can’t be located within a city’s limits unless the area’s population is less than a certain threshold established by the USDA. That number can change depending on the data collected by the U.S. Census Bureau. The best way to find out if a property is considered rural is to check the USDA Rural Property Housing Eligibility page.

Can I buy a condo with a USDA loan?

Borrowers can use USDA loans to finance a condo. The requirements for single-family homes are generally the same, however, the USDA will refer to guidelines from the Federal Housing Administration to determine if a condo is eligible for financing. There are a few other requirements including a co-blanket insurance policy that meets USDA insurance requirements to provide coverage for all of the units. The condo must also be on the FHA and VA’s approved condos list.

Updated: July 6, 2017