USDA Loans, often known as rural development home loans, are 30-year fixed-rate mortgages targeted at low-to moderate-income home purchasers. USDA home loans are guaranteed by the United States Department of Agriculture.
The USDA does not lend money to the home buyer directly, but rather offers default insurance to USDA-approved lenders that offer USDA home loans. Default insurance provides a significant incentive for lenders to lend money to eligible home purchasers who do not qualify for a conventional mortgage. USDA mortgage loans do not require a down payment and offer 100% financing.
USDA mortgages include income restrictions and the home must be situated in a specified rural area. Surprisingly, a USDA house loan is available in a wide variety of areas around the United States.
» LEARN MORE: USDA Loan Calculator
The following information will help you determine whether you meet the USDA guidelines.
USDA Loan Requirements
The home must be located in an eligible location
Co-signer and Co-borrower
Yes, but USDA loans can make this complicated
Credit Score Requirement
Usually 640, but can be lower with some lenders
Down payment and closing costs to 100%
115% of the county's median household income
1-unit home, with no loan maximum
Minimum Down Payment
No down payment requirement
Monthly Mortgage Insurance (MIP)
0.35% required with all loans
30-year fixed-rate only
Owner occupied only
Seller Paid Closing Costs (Seller Assist)
Up to 6% of sales price
Upfront Mortgage Insurance
1% of the loan amount
Does my area qualify for a USDA loan?
Homes must be located in a designated rural location. The USDA provides a lookup tool to determine whether the home meets USDA area guidelines.
Co-borrower and co-signer
A cosigner is permitted under the USDA home loan program. The cosigner(s) will not make up for the applicant's poor credit but will assist in improving the applicant's debt-to-income ratio.
Debt to income is a simple calculation that compares monthly debt payments to monthly income. For instance, if your monthly income totals $4,000 and your monthly debt payments total $1,000, the debt ratio is 25% ($1,000 divided by $4,000 is 25%).
The USDA prefers that applicants maintain a debt-to-income ratio of less than 41 percent for their monthly expenditures and new mortgage payments.
If the cosigner has moderate debt and a sufficient monthly income, the cosigner can help with the debt ratio. In brief, the income and debt of the cosigner are added to the borrower's income and debt. Hopefully, the combination of sources of income will result in a lower debt-to-income ratio, making the application more appealing to the lender. If you choose to add a parent or both parents as a co-signer, they must reside in the residence.
That is correct; co-signers are required to reside in the property. Borrowers who are not occupants are not permitted.
Credit score required for a USDA home loan
The minimum credit score for most lenders is 640, however some lenders may go below 640.
Gift money for down payment and closing costs
The USDA permits the use of gift money. The cash may be used to cover the down payment and closing fees.
A gift may be made by a family member, which includes the borrower's children, spouse, or other dependent, or by another person who is connected to the borrower by marriage, blood, adoption, or legal guardianship; or by a fiancée, fiancé, or domestic partner. The contributor of the gift may not be, nor may he or she have any relationship with, the developer, builder, real estate agent, or any other party to the transaction.
USDA loans do not have a maximum lending amount.
Income requirements for a USDA loan
The USDA loan program does enact income limits that are adjusted for family size. The base income across the United States are:
- 1-4 member household: $82,700
- 5-8 member household: $109,150
To help you assess your eligibility, the USDA provides an easy-to-use income lookup tool.
Minimum down payment
No down payment is required provided the home appraises at the sales price. It should be noted that if the home appraises higher than the sales price, the difference between the sales price and appraised value can include the closing costs in the loan amount.
Monthly mortgage insurance (MIP)
USDA loan requires an annual mortgage fee. The fee is collected in monthly installments. Here's how the fee is calculated:
- Loan Amount x 0.35% = Annual Cost
- Divide by 12 to find the monthly cost
USDA loans are only available for 30-year fixed-rate mortgages.
USDA loans are available for one family owner occupied principal residences only.
The monthly fee is 0.35% of the loan amount, divided by 12 months.
Another example: $101,000 x 0.35% = $353.50 (annual renewal cost). Divide the annual cost by 12 months and you arrive at the monthly premium of $29.46.
Seller paid closing costs (seller assist)
The home seller is permitted to pay the buyer's closing and prepaid costs up to 6% of the sales price.
Upfront mortgage insurance
Like the FHA and VA loan programs, the USDA requires home purchasers to pay a guarantee fee. The guarantee fee funds the USDA's home lending program. The cost is negligible, amounting to less than 1% of the mortgage balance. The financing charge, sometimes referred to as the guarantee fee, is equivalent to 1% of the loan amount.
For instance, if you borrow $100,000, multiply $100,000 by 1% to get $1,000. The guarantee fee may be paid in cash or financed at settlement.
The loan amount, if funded, would be $101,000.
Frequently Asked Questions About USDA Loans
Are USDA loans fixed-rate?
The USDA only permits a 30-year fixed-rate.
Can USDA loans be refinanced?
Yes, USDA loans can be refinanced.
What are the disadvantages of USDA home loans?
USDA requires monthly mortgage insurance regardless of the down payment. USDA home loans are only available in eligible areas and there are income limits with USDA mortgages.
Do USDA loans have PMI?
Yes, however, the USDA uses the term MIP, for mortgage insurance premium
How hard is it to get a USDA loan?
USDA loans are similar to conventional mortgages, with the exception of USDA income restrictions and geographical limitations.