USDA home loans: Features, benefits and eligibility
The U.S. Government offers a number of mortgage products that are less restrictive and more affordable than conventional loans. One example is the USDA Rural Development home loan, backed by the U.S. Department of Agriculture. Originally designed to help rural citizens become homeowners, geographic eligibility has significantly expanded over the years. Because the USDA guarantees 90% of each loan in case of borrower default, lenders can extend attractive features to borrowers like 0% down-payment options, low interest rates and minimal insurance costs.
Make sure to ask a mortgage expert if the property you want to buy or refinance is eligible for a USDA home loan, and if it’s right for you and your life situation. In the meantime, the breakdown below will give you an idea of the benefits and restrictions involved:
A common myth about USDA loans is that they’re reserved for farmers and borrowers who live in the country. Actually, the definition of “rural” applies to roughly 97% of the U.S. land area! Even if the property you want to buy or refinance is located in a city suburb, it may still qualify geographically for a USDA home loan.
Another myth about USDA loans is that only low-income borrowers are eligible. There are actually two USDA home loan programs: the Direct loan, created for very low to low-income borrowers; and the Guaranteed Housing loan, which allows for a household income of up to 115% of the area’s median income. (For the purpose of this article, we will be focusing on the Guaranteed Housing loan.) Some middle-class homebuyers, then, have the opportunity to take advantage of 100% financing and low rates.
As with conventional loans, USDA-approved lenders need to see minimum credit figures to validate loan approval. Some use a 620 credit score as the minimum, though each individual case and lender will vary.
USDA purchase loans are restricted to 15- and 30-year fixed rate products. There are no loan amount limits, but most lenders will use the conforming loan limits established by Fannie Mae and Freddie Mac, which is $424,100 for most of the country. With a 0% down payment, low rates and minimal mortgage insurance, the USDA home loan is a great option for borrowers who qualify.
Refinancing is limited to 30-year fixed rate products, and only applies to existing USDA loans. Homeowners looking for a lower rate and monthly payment can refinance by way of a streamline process similar to that of FHA and VA loans. And if the mortgage stays current over the previous year, there is no appraisal, credit report or debt-to-income calculation required. A cash-out refinancing option is not available with USDA home loans.
Like the VA and FHA, the USDA allows for renovations and improvements to new and existing properties when the cost is rolled into the purchase or refinance transaction.* The USDA allows for financing of up to 102% of the appraised home value in order to make improvements. Funds can be used for essential household equipment, energy efficiency upgrades, installing or updating utilities or outfitting the house to accommodate a disability, among other things.
The USDA home loan requires a 1% upfront insurance fee and an annual .35% insurance payment, which are typically rolled into the monthly mortgage payment. These figures represent a significant reduction from those previous to October 2016, which were 2.75% and .5%, respectively.**
A USDA home loan can only be used for a primary residence.
To learn more about USDA home loan benefits, contact a knowledgeable mortgage expert today!