A USDA home loan is a loan that is guaranteed by the Federal government through the United States Department of Agriculture. The USDA home loan is a program of the USDA Office of Rural Development, an agency within the United States Department of Agriculture. The RDA was established in 1990 in an amendment to the Consolidated Farm and Rural Development Act of 1972. The goal of the RDA and the home loan program is to improve the economy and quality of neighborhoods in rural America by providing an incentive for homebuyers to purchase property in qualified rural areas.
The USDA home loan program allows low and moderate income homebuyers to purchase homes to serve as their primary residences in eligible rural areas without requiring a down payment. Under this program which is also sometimes called Rural Housing Loan program or Section 502 Loan program, qualified borrowers can purchase a home an eligible rural area while financing 100% of the purchase price.
Lenders are able to provide 100% financing to borrowers under the USDA home loan program because the loan is insured 90 percent through the federal government. This eliminates most of the risk to the lender, allowing more borrowers to qualify for these loans without a high down payment requirement. This is the only no down payment loan option currently available to those who are not in the military and therefore do not qualify for the VA home loan program.
In order to qualify for the USDA home loan program, both the borrower and the property must meet certain criteria. The borrower must fall within the middle-to-low income bracket for their family size in their state, which means the income limits will vary depending on the state in which the borrower lives. Moderate income is defined as the greater of 115 percent of the U.S. median family income or 115 percent of the average statewide and state non-metro income for the family size. The USDA home loan program does not have a minimum credit score, but lenders may set this eligibility as they see fit as most lenders who offer the USDA home loan require a score of 620 or higher, although some do offer financing with 580 FICO with extenuating circumstances. Borrowers who have filed bankruptcy in the past will need at least three years between the bankruptcy discharge date and the application for a USDA loan. In certain situations, extenuating circumstances that led to the bankruptcy may make it possible for the applicant to apply for a USDA loan after less than two years from bankruptcy discharge.
For the property to be eligible, it must be located in a “rural” area, but this does not mean that it has to be in a farming community or miles from stores and restaurants. Most small towns actually meet the definition of rural, as do most suburbs. In fact, only about 3 percent of the United States is considered ineligible. Additionally, the property must also be owner occupied and be considered safe and adequate housing.
USDA home loans are 30 year fixed-rate home loans and borrowers are unable to attain an adjustable rate or shorter term loans under this program. The guidelines require homeowners to pay a mortgages insurance premium to help fund the program which is 1% of the loan size at closing and 0.35% of the remaining principal balance amortized annually and paid through the monthly payment. The upfront mortgages insurance is added to the balance of the loan, and thus it is not a cost due at closing. The USDA monthly mortgage insurance is also lower than FHA and conventional mortgage financing. The USDA home loan program can be used as a refinance option on qualified properties with existing USDA financing if the rate or term of the USDA loan is more favorable to the borrower than the existing loan, cash out refinancing however is not permitted with USDA mortgage loans.
MAXIMUM LOAN AMOUNT
The USDA does not set a maximum loan amount, but the lender will have a maximum for each individual borrower. This will be based on credit score, debt to income ratio, assets, income and any previous repayment history for mortgages or consumer debt. Typically, the debt to income ratio for a borrower with a credit score below 660 cannot be more than 41%, but this may can vary based on each lender’s requirements.
Can a borrower use USDA loans to purchase a second home?
In order to use the USDA home loan program, the borrower must live in the home as his or her primary residence. This means it cannot be used to purchase a vacation home or rental property. Borrowers can however keep their existing homes as a vacation home or rental property and use the USDA loan to buy the new home which will become their primary place of residence.
Can I use the USDA home loan for a rental property?
No, USDA home loans must be used for a primary residential home only. Multi-family properties may be eligible, but only if the buyer buys just one unit and intends to live in that unit.
Can I use the USDA home loan program to purchase a working farm?
No, the USDA home loan program is designed for residential property in qualified rural areas and it does not include agricultural property.
Can USDA home loan funds be used to purchase manufactured homes?
Yes, the USDA home loan program can be used to purchase a new manufactured house. The home must be constructed following the Federal Manufactured Home Construction and Safety Standards and meet all HUD Zone III energy ratings. The home must be purchased from an approved Rural Development Dealer and be mounted to a permanent foundation with the wheels, hitch and axles removed. All homes whether manufactured or not, must be built on permanent foundations and be properly anchored to resist wind damage with on site utilities.
Are USDA mortgage rates competitive?
USDA mortgage rates are competitive with conventional 30-year fixed rates and may be lower than comparable conventional loans. Because the mortgage insurance rates are lower, this is typically the most affordable loan option for borrowers who don’t have a significant down payment for their home purchase.
Can a borrower with challenged credit qualify a USDA home loan?
This decision is ultimately in the hands of the lender. Some mortgage banks are willing to accept borrowers with lower credit scores and credit challenges because of the loan’s guarantee, but this is not definite as every lender will have its own minimum required credit guidelines.
My income is above the income limits, is there any way for me to qualify?
Borrowers may be able to get USDA loans even with an income level above the 115 percent cutoff. The USDA has several deductions that may be able to reduce a borrower’s qualifying gross household income to help them qualify. These include having a disabled or handicapped individual in the home, documented childcare expenses, documented medical expenses for family members age 62 or older and full time students over the age of 18. Borrowers who wish to use the program should discuss their income qualifications with their lender to determine their true eligibility.
Can someone cosign for a USDA loan?
If a borrower lacks sufficient income to qualify for a USDA home loan, the underwriting guidelines do allow qualified cosigners who do not live in the property to cosign the loan for the buyer. However, cosigners cannot make up for a borrower’s poor credit history.