Updated: May 10, 2024
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USDA home loans offer an affordable path to homeownership with minimal to no down payment, tailored for eligible rural and suburban homebuyers. Unlike conventional mortgages, these government-backed loans have below-market interest rates and reduced fees, making them an attractive option for purchasing, renovating or refinancing a home.
USDA loans offer low-interest and no down payment options for rural homebuyers, which makes them different from FHA or VA loans.
There are three USDA loan types: Guaranteed, Direct and Home Improvement Loans and Grants.
Common USDA loan requirements include U.S. citizenship, location eligibility and income limits, among other things.
A USDA mortgage loan is designed to foster homeownership in less densely populated rural and suburban areas. These government-backed loans offer borrowers benefits like lower interest rates and a streamlined approval process. They target low-to-moderate-income families, enabling many to buy homes with zero down payment and lower overall costs.
USDA loans require approval from USDA-qualified lenders and are primarily influenced by the borrower’s income and debt-to-income ratios to ensure affordable repayments. Fixed-rate terms generally range from 15 to 30 years. However, if your income increases and exceeds the program’s threshold, you may need to refinance your mortgage into another loan type.
USDA loans come in three types. Understanding their differences allows you to choose the right loan for your situation. Our table guides you through the specifics of each one.
USDA Loan Type | Issuer | Interest Rate | Who Should Get One |
|---|---|---|---|
USDA Guaranteed Loan: A loan provided by private lenders and backed by the USDA | Private lenders | Varies, generally competitive | Individuals with moderate incomes who want a broader selection of lenders and slightly better rates. |
USDA Direct Loan: Aimed at low- and very-low-income applicants | USDA directly | 4.5% (as low as 1% when modified by payment assistance) | Low-income families that need extra financial help; these offer the most flexible terms. |
USDA Home Improvement Loans and Grants: For repairs and upgrades, can be a loan, grant or a combination | USDA directly | Fixed at 1% | When needing to repair or improve an existing home |
While USDA home loans have lower interest rates, you’ll encounter certain fees. Understanding these will allow you to manage your budget more effectively:
Upfront Guarantee Fee: This one-time fee secures your loan and is generally 1% of your total loan amount. For instance, on a $200,000 loan, this would amount to $2,000. This fee can typically be financed into the loan amount.
Annual Fee: This ongoing fee is calculated at about 0.35% of the remaining loan balance per year, payable monthly. On a $200,000 loan, the first year's annual fee would be approximately $700, decreasing as the loan balance is paid down.
USDA home loans may include other costs, such as inspection, application and late fees. Be sure to ask about these to get a complete picture of your loan expenses.
Explore the unique advantages and disadvantages of USDA loans in the table below to see if they align with your financial goals and circumstances.
Understanding USDA loan requirements lets you determine your eligibility. Here’s what you need to consider:
Citizenship
Eligible to U.S. citizens, non-citizen nationals or qualified aliens.
Location
The property must be in a USDA-eligible area, which includes many rural and some suburban locations.
Income
Income limits vary by location and household size and are generally aimed at low- to moderate-income families.
Credit Score
Minimum credit score requirements exist, typically 640 for automated approvals, with possibilities for lower scores under certain conditions.
Debt-to-Income Ratio (DTI)
This figure should be 41% or less, with flexibility under certain circumstances.
Meeting USDA loan requirements can lead to affordable homeownership in qualified rural and suburban areas. Review these criteria to ensure you align with them.
Knowing the steps to secure a USDA home loan can take the uncertainty out of the process, making your path to homeownership smoother. Being prepared can speed up the loan approval, saving you time and potentially money. Here are the steps you'll need to follow.
First, you'll want to confirm you meet the eligibility criteria, which include income, credit score and U.S. citizenship or permanent residency. Knowing these specifics upfront helps you avoid any surprises down the line.
Only some lenders are authorized to offer USDA loans. Spend some time researching to identify those that are USDA-approved. Consider asking for recommendations and reading customer reviews to understand which lender might be the best fit for you.
Pre-approval is more than just a preliminary chat with a lender. You'll need to submit financial documents, such as tax returns and pay stubs, for a thorough review. A pre-approval letter strongly indicates your buying power and shows sellers that you're a serious candidate.
The property must be located in an area designated by the USDA as rural or suburban. Use the USDA's online maps to identify eligible areas and work with a real estate agent familiar with USDA loans to find properties that meet all the criteria.
After identifying a property, you'll submit a full loan application. This includes a range of documentation like proof of income, employment verification and a record of your assets. The lender will provide a checklist of what's needed.
A USDA-approved appraiser will evaluate the property to ensure it meets all USDA standards related to safety, structural integrity and overall condition. The appraisal must support the loan amount you're seeking.
This is the "make-or-break" phase. The lender will carefully review your application, double-check the property's eligibility and your creditworthiness and ensure all other requirements are met. You may need to submit additional documents during this phase.
You'll meet with various parties involved in the loan process to sign legal documents. This is when you'll pay any remaining closing costs, after which the property is yours.
Understanding how to apply for a USDA home loan can make the process much easier to navigate. Each step offers challenges and opportunities, so take your time and don't rush.
You can refinance a USDA home loan under specific conditions. For example, your original loan must be USDA-financed or guaranteed and at least 12 months old. The refinanced loan offers a fixed interest rate with a 30-year term and requires borrowers to meet income guidelines, occupy the property and have no cash out from equity. Properties in newly ineligible areas remain qualified for refinancing, ensuring wider accessibility.
We answered some common questions to clarify the application process and requirements. Explore these to gain a deeper understanding of how USDA loans work and how they could benefit your home-buying journey.
USDA loans are not limited to first-time homebuyers. They are available to any eligible borrower who meets the income and geographic requirements, regardless of whether they have previously owned a home.
The USDA adopts the U.S. Bureau of the Census's definition of "rural" for loan eligibility, focusing on housing and population density. Rural areas are defined as open country and settlements with fewer than 2,000 housing units and 5,000 residents.
An increase in income after obtaining a USDA loan does not disqualify you from your current loan or automatically require refinancing. However, if your increased income exceeds the program’s income thresholds, it could impact your eligibility for future USDA loans.
Mortgage insurance is not required for a USDA loan. Instead, it requires an upfront guarantee fee and an annual fee that serves a similar purpose, helping to fund the government’s backing of these loans.
Currently, USDA loans are only available with fixed interest rates, ensuring predictable monthly payments for the duration of the loan, which is typically set at 30 years.
