USDA Loan Program
Benefits of a USDA Loan
The USDA loan is one of the most beneficial programs for homebuyers wishing to purchase a home outside of densely populated areas.
Designed to help rural and suburban Americans achieve the dream of homeownership, the USDA loan comes loaded with benefits that open the doors of homeownership to many who may not otherwise qualify for conventional home financing.
Contents
Part 1: Primary Benefits of USDA Loans
Part 2: Compare Mortgage Options
Part 3: Potential Cons of USDA Loans
The Pros of USDA Loans
USDA loans offer a number of advantages over other mortgage options, largely because the USDA guarantees all loans against default. This means that lenders can take on more risk and offer homebuyers favorable loan terms.
No Down Payment
Of the many advantages, the most cited is the ability to obtain 100 percent financing without having to spend years saving for a down payment. Along with VA loans, this government-backed loan option is one of the last remaining $0 down payment mortgage options out there.
Compare that to other loan options:
|
Loan Type |
Minimum Down Payment Required |
|
USDA |
0 |
|
FHA |
3.5% |
|
VA |
0 |
|
Conventional |
Typically 5- 20% |
Competitive Interest Rates
Due to the USDA guarantee, lenders are able to offer some of the lowest interest rates on the market. While actual rates will vary by lender due to other contributing factors, know that your credit profile and current market conditions play a vital role in your mortgage rate.
Low Monthly Mortgage Insurance
With a conventional loan, lenders require you to pay “private mortgage insurance” (PMI) if you don’t come up with a 20 percent down payment. FHA loans also have high annual mortgage insurance fees.
USDA loans, on the other hand, don’t have PMI. Instead the USDA uses two fees: an upfront guarantee fee that is paid once when you close on the loan, and an annual fee, which gets lumped into your monthly mortgage payment. The upfront fee is 1 percent of the total financed amount while the annual fee is 0.35 percent of the loan’s current balance.
USDA loans have the lowest funding fee of all government-backed loan products.
Here’s how USDA mortgage insurance compares on a $200,000 mortgage:
|
Loan Type |
PMI Features |
Mortgage Insurance Rate |
Estimated Costs |
|
USDA |
Borrowers pay annual fee for the life of the loan. |
1% Upfront Funding Fee |
$2,000 Upfront |
|
FHA |
Borrowers pay annual fee for the life of the loan. |
1.75% Upfront Funding Fee |
$3,500 Upfront |
|
VA |
Fee varies based on nature of service, down payment and first-time use. |
2.15% Funding Fee for Most Purchase Loans |
$4,300 Upfront |
|
Conventional |
Rate varies based on credit score and down payment amount. |
0.2 – 1.5% PMI |
$1,000 – $2,000 Annually |
For conventional loans, PMI typically ends once the borrower’s loan-to-value ratio reaches about 80 percent.
Borrowers with FHA and VA loans can lower their mortgage insurance costs by putting down at least 5 percent.
Flexible Credit Guidelines
Most conventional lenders look for a credit score of at least 660, however you’ll need something closer to 720 to qualify for the lowest interest rates. Luckily, there is no minimum credit score for USDA loans, however you need a score of 640 or higher to qualify to use the USDA’s automated underwriting system. Borrowers with lower credit scores can still qualify for USDA loans using manual underwriting.
Millions are Eligible
The vast majority of the United States falls within what the USDA considers an eligible, rural area. While the goal is to boost population in non-urban areas, the USDA’s definition of rural areas casts a broad net. In fact, a “rural” area is defined as any area with a population of less than 35,000 people. That means that an estimated 97 percent of the country could qualify for a USDA loan.
Learn more about other property requirements for USDA loans.
Ability to Use if You Already Own a Home
While this benefit only applies in certain circumstances, it is possible to own additional property and apply for a USDA loan. The main thing to keep in mind is that the other property cannot be financed by a previous USDA loan.
Favorable Loan Terms
The USDA loan is available in common fixed-rate terms like 30-year and 15-year mortgages.
Comparing the Loan Types
According to the most recent USDA data, the average USDA mortgage in 2017 was $145,436. Let’s take a closer look at the four major loan options with a real-world scenario. For a simple comparison, let’s compare a $150,000 mortgage with an interest rate of 4.75 percent. We’ll assume that you are making the minimum required down payment for each loan type and use a consistent estimate for monthly property taxes and homeowners insurance ($250).
|
Loan Type |
Minimum Credit Score |
Minimum Down Payment |
Funding Fee |
Principal & Interest |
Taxes & Insurance |
Mortgage Insurance |
Monthly Payment |
|
USDA |
640 |
$0 |
$1,500 |
$790 |
$250 |
$44 |
$1,084 |
|
FHA |
640 |
$5,250 |
$2,625 |
$769 |
$250 |
$106 |
$1,125 |
|
VA |
620 |
$0 |
$3,225 |
$799 |
$250 |
$0 |
$1,049 |
|
Conventional |
660 |
$7,500 |
$0 |
$743 |
$250 |
$90 |
$1,083 |
As you can see, the two zero-down options have the lowest monthly payment given these parameters. But remember the second benefit from above; USDA loans typically offer some of the lowest interest rates on the market – meaning your specific situation could yield even more savings, depending on other compensating factors.
Credit score minimums will vary based on the lender, loan type and other factors. While FHA, USDA and VA loans allow for credit scores below the listed minimums, most lenders require at least a 620 score for any government-backed mortgage.
Note: In this example, we used:
- Funding Fee:
- USDA Loan = 1%
- FHA Loan = 1.75%
- VA Loan = 2.15%
- Conventional loans do not have a funding fee
- Private Mortgage Insurance:
- USDA Loan = 0.35% Annual Rate
- FHA Loan = 0.85% Annual Rate
- VA loans do not have PMI.
- Conventional = 1% Annual Rate
Who is Eligible for a USDA Loan?
Any individual or family who plans to occupy a home located in an eligible rural area as their primary residence may qualify for a USDA Rural Development home loan.
Applicants must provide sufficient income verification and a credit history that indicates an ability and willingness to meet repayment obligations.
Lenders may have their own internal guidelines and requirements in addition to those set by the USDA.
Learn more about USDA loan eligibility here.
Limitations to USDA Loan Eligibility
While the benefits of USDA loans are undeniable, it is important to note that there are a few “cons” to USDA loans. Before looking only at USDA loan advantages, consider these three potential roadblocks that could hinder your eligibility.
Location Requirements
Despite the USDA’s broad definition of a rural area that allows the majority of the population the ability to qualify for a USDA mortgage, there are other property requirements that the home must meet. For example, the property must be easily accessible from a paved or all-weather road surface.
Primary Residence Requirement
One of the most important requirements unique to most government-backed loans is the occupancy requirement. Because USDA loans are designed to spur growth in rural areas, the property being financed must be your primary residence.
Income Limits
Unlike any other loan option, the USDA sets income limits to ensure the program maintains its primary goal of helping low and moderate-income families find safe and sanitary housing. These income limits are based on total household income and vary by household size and your local Metropolitan Statistical Area (MSA). Use this chart to determine your income limit.
How to Start your USDA Loan
Interested homeowners can contact a home loan specialist to see if they are eligible.