The US Department of Agriculture is well recognized for its efforts in promoting farming, food production, and forestry. However, their scope of work has expanded over the years to include providing excellent and inexpensive housing for individuals in suburban and rural regions through their housing program: The USDA Single Family Housing Guaranteed Loan Program.

The USDA housing loan is open to everyone, particularly low-income individuals looking to purchase a family home in the suburbs or rural areas.

You're probably wondering if you must buy a house in a rural or farming area to qualify for this loan. Well, far from that. The USDA eligibility map classifies more than 91% of the United States as rural. So, as long as the house you want to buy is not in a metropolis, you should be able to secure the financing.

This article contains all the information you need to get 100% financing through the USDA loan program to fulfill your dream of becoming a homeowner.

 

What is a USDA Loan?

The USDA housing loan was established by Section 502 of the Housing Act of 1949 as part of the department's rural development program.

These loans are issued and guaranteed by the United States Department of Agriculture. They are intended to assist low-income individuals in financing the purchase and improvement of a single-family primary residence in rural and suburban regions. 

If you are eligible, a USDA loan is relatively easy to qualify for due to its lower minimum credit score requirements when compared to many conventional loans and allows you to purchase a property with no down payment. Also, closing costs are often lower than FHA loans and can be rolled into the loan payment.

The United States Department of Agriculture guarantees and underwrites the USDA loan. And there are three primary categories of the loan:

• USDA Direct Loan- This loan is administered directly by the United States Department of Agriculture to qualified low-income individuals who want to buy a primary residence. The interest rate can be as low as 1% and can be paid over 30 years.

• USDA Guaranteed Loan- This loan is guaranteed by the USDA but administered by registered lenders. It is offered to qualified low-income buyers in the suburbs and rural areas. The US Department of Agriculture also regulates lending limits and underwriting requirements.

• USDA Home Improvement Loan-  Qualifying homeowners can receive this loan for home repairs and renovations. Additionally, the home improvement grant under this program provides funding for the repair and remodeling of your home without requiring repayment.

However, the USDA loan is not as popular as other types of loans and is not usually included as a mortgage package on the websites of many mortgage providers. We're proud to announce that X2 Mortgage does offer USDA Loans though!

 

USDA Loan Requirement

To qualify for a USDA loan, there are specific requirements you must meet.

Status

The first and most significant criteria to be eligible for a USDA loan is to be an American citizen or a legal permanent resident of the United States.

Location

The USDA loan is part of the government's initiative to support rural development. As a result, the loan is only available in rural parts of the United States. However, according to the Department of Agriculture, the rural area accounts for around 91% of the country's regions.

To find out whether the property you are considering buying is within the USDA loan eligibility region, go to the USDA website and use the USDA eligibility map.

Income 

The USDA loan was created to help those in the United States with economic needs. To qualify for the loan, you must meet the USDA's monthly income limitations, which means your adjusted gross income cannot be more than 115% of the area's median income.

So, for example, if the typical annual income in your city is $50,000, you can only qualify for a USDA loan if your yearly income is $57,500 or less.

However, different areas have varying income limits, so you must go to the USDA website to verify your area's income limit and know if you are eligible for the loan based on your income.

You must show that your income is below the area's maximum and prove that you have a reliable income and can make your mortgage payments without difficulty for at least 12 months.

Credit Score

To qualify for any type of loan, you must demonstrate your creditworthiness as a borrower. However, the USDA loan has a lower credit requirement than most other loans. 

To be approved, you simply need a FICO score of 580. However, we reccomend a score around the 640+ mark as it's much easier to qualify without needing to meet other strict conditions.

Debt-To-Income Ratio

As with any loan, lenders want to ensure that you are not presently paying off a large amount of debt with your salary. As a result, your DTI will be taken into account. 

A Debt-to-Income (DTI) ratio of 50% or less is required to qualify for a USDA loan. Your DTI is your monthly income before taxes, minus your monthly debt payments. These debt payments can include rent, credit card bills, school fees, and more.

 

How the USDA Loan Works

With a USDA loan, you can get 100% financing for your home at a low-interest rate. The loan works similarly to other types of mortgages, especially an FHA Loan. 

The following are the essential components of the USDA loan:

Down Payment

The USDA loan is one of two loans that does not require a down payment to finance a whole home purchase. The other is a VA loan for veterans. However, if you make a down payment, it will lower your interest rate and monthly mortgage payment.

Closing Cost

The USDA loan does not require a down payment, but you will still need to pay closing costs. However, the USDA has some of the lowest closing cost requirements of any mortgage.

In addition, you can also roll your closing costs into the loan amount. This way, you can finance your home purchase without making any initial payment.

Guarantee Fee

Although the USDA guarantees the loan, the borrower is still obliged to pay a guarantee fee to assist in the continual funding of the USDA loan program. This includes a 1% upfront guarantee fee that can be rolled into the loan and a 0.35% annual fee divided into 12 installments and added to your monthly mortgage payments.

Loan Term

The USDA loan only offers a fixed loan rate for a loan duration of 30 years. The program does not allow you to negotiate a 15-year fixed option or get an adjustable-rate mortgage (ARM).

Interest Rate

USDA loans have lower-than-market interest rates since the government guarantees them. However, a low-interest rate is not automatic. You may need to shop around with several USDA mortgage lenders to get the most reasonable rate. Luckily, X2 Mortgage does the shopping for you!

To get the best interest rate and monthly payments, you'll need a good credit score and a low debt-to-income ratio. We also advise that you make a larger down payment, which will lower your interest and monthly payments.

Home Appraisal

• Your home appraisal must show that it meets USDA standards, which include:

• The property must be your primary residence in a rural area (no vacation homes or investment properties allowed).

• The house's water, power, heating, and cooling systems must all be fully operational.

• From the foundation to the roof, the home must be structurally sound.

• Access to the property must be through a paved or all-weather road.

 

Pros and Cons of USDA Loans

 

Pros

No Down Payment

Unlike other mortgages, a USDA loan requires ZERO down payment. This removes any impediment or hardship on your path to becoming a homeowner.

Flexible Credit Score Requirement 

A USDA loan does not have a minimum credit score requirement. However, to be easily approved by a lender, you must establish your creditworthiness by maintaining a high credit score. As such, the minimum credit score needed differs from lender to lender.

Finance Closing Cost into Loan

With a USDA loan, you can roll your closing costs into the loan payment. You can also pay the closing costs through gift cash or by the seller.

Lower Interest Rate

USDA mortgage interest rates are usually between 1% and 3% of the loan amount, which is among the lowest on the market.

Cons

Geographical Restriction

Qualifying properties are only those in rural areas of the United States. And to be deemed rural, a region must have a population of 35,000 or fewer.

Income Restrictions

Even if you genuinely need the loan, you will not be eligible for a USDA loan if your family income exceeds the income restrictions specified for your area.

Property Restriction

A USDA loan can only be used to fund a single-family residence that is your primary residence. Therefore, the loans cannot be used to purchase vacation homes or investment properties. Also,  the home cannot be; a duplex, high-priced, larger than 2,000 square feet, and cannot contain an in-ground swimming pool.

Loan Amount Restriction

Although the USDA does not limit how much money you may borrow through the program, the amount you can borrow is usually restricted by your income and debt-to-income ratio. Typically, your debt-to-income ratio must be at least 41%.

Fixed Loan Term

USDA loans are only available with a 30-year fixed loan rate. You can’t get an adjustable-rate mortgage (ARM).

 

Are You Required to Be a First-Time Home Buyer to qualify for a USDA Loan?

No, the USDA loan is accessible to both first-time and repeat home buyers. You can also refinance an existing USDA loan into a new USDA loan. However, if you already have a different loan type, you cannot refinance with a USDA loan.

 

How is a USDA Loan Different from Other Mortgages?

There are other loan options available besides the USDA loan if you're looking for a government-sponsored or low-income mortgage. Let's compare some of your options and how they differ from the USDA loan.

USDA Loan vs. FHA Loan

USDA and FHA mortgages are government-backed loans guaranteed by the Departments of Agriculture and Housing and Urban Development, respectively. However, the USDA loan has income and geographical restrictions, whereas the FHA loan is available for any income level to buy a home anywhere in the country. 

Another distinction is the required down payment. While the USDA loan needs no down payment, an FHA loan demands between 3.5 and 10% down payment, depending on your credit score.

And while both programs have low credit score requirements compared to other loan types, the FHA has a far lower credit score requirement of 580 or less than the USDA, which requires a FICO score of 640. However, a USDA loan has a cheaper closing cost and guarantee fee than an FHA loan; these fees can also be rolled into the loan. 

USDA Loan vs. VA Loan

In many aspects, the USDA loan is similar to the VA loan; both are government-backed loans, with the VA loan supported by the Department of Veteran Affairs. These loans also have similar requirements in terms of a low credit score and no down payment.

However, the VA loan is exclusively accessible to qualified military service members (veterans) and their spouses.

USDA Loan vs. Conventional Loan

The USDA loan and a conventional loan are quite different. The former is backed and subsidized by the government, but the latter is not. 

However, their differences go beyond sponsorship. For example, a conventional loan has a lower credit score requirement than a USDA loan, but the interest rate is often higher. A conventional loan is also more widely available and easier to get than a USDA loan.

 

Bottom Line: Is USDA Loan Right for You?

If you have a decent income and want to buy a modest house for your family but don't have enough money for a down payment, a USDA loan may be appropriate for you. Just keep in mind that not every house will be eligible for the loan.

Even though a USDA loan requires no down payment, it is not the ideal option for everyone. We often advise that if you can afford a down payment of up to 20%, a conventional loan may be a better alternative for you because you won't have to pay any additional costs in the form of mortgage insurance.