Is A USDA Home Loan Right For You?

You probably associate the U.S. Department of Agriculture (USDA) with the food pyramid and food safety or inspection services. But did you know the USDA is also involved in rural development?

The USDA believes that encouraging homeownership in rural areas creates strong communities and a better quality of life. It does this through its Single Family Housing Guaranteed Loan Program for low- to moderate-income families. Although Rocket Mortgage^® doesn’t offer USDA loans at this time, we can explore what you should know if you’re considering one.

What Is A USDA Home Loan?

A USDA home loan is a competitively priced type of mortgage that makes purchasing a home more affordable for low- to moderate-income home buyers interested in homes in rural areas.

Because the U.S. Department of Agriculture backs USDA loans, lenders can offer more affordable home loans to borrowers with credit issues or smaller savings. In many cases, lenders can offer lower interest rates than they would with conventional loans. While you still pay closing costs with a USDA loan, you can buy a home with no down payment.

What Are The Benefits Of USDA Loans?

USDA loans have key advantages that make them an attractive choice for buyers interested in homes in rural areas.

No Minimum Down Payment Requirement

USDA loans have no minimum down payment requirement. You can buy a home with no money down.

Competitive Interest Rates

USDA loans typically have competitive interest rates compared to conventional loans. Because the loans are backed by the U.S. government, lenders can offer them for no money down and more relaxed credit score requirements.

Credit Flexibility

While most lenders prefer a credit score of 640 or higher, you may be able to qualify for a USDA loan with a lower credit score.

What Are The USDA Loan Requirements?

Home buyers must meet certain eligibility requirements to qualify for a mortgage or a USDA construction loan. For example, you must live in the home, and it must be your primary residence. Here’s an overview of the other requirements:

Residency

You must be a U.S. resident, noncitizen national or permanent resident.

Location

You can see if a home is eligible by visiting the USDA’s eligibility map. You can search for a property on the interactive map and confirm it's in a USDA-approved area.

Income

USDA loans are for families who demonstrate economic need. The household’s adjusted gross income can’t be more than 115% of the median income for the area.

In addition, you must show your income is stable and (based on your assets, savings and income) that you can afford your mortgage payments for at least a year.

Debt-To-Income Ratio

Your mortgage lender will also look at your debt-to-income ratio (DTI) when they evaluate your USDA loan application. To give yourself the best chance of qualifying, we generally recommend a DTI of 43% or lower.

Credit Score

Most lenders require a credit score of 640 or higher. You may still qualify for the loan if your score is just below that. Talk to a lender to discuss your options.

Guarantee Fees

All USDA loans have upfront and annual guarantee fees. Guarantee fees are similar to mortgage insurance and go toward funding the USDA loan program.

The upfront fee is 3.5% of the loan’s value and must be paid at closing, though lenders may allow you to roll the fee into your mortgage. The annual fee, which lasts for the life of the loan, is 0.5% of the loan’s value. It gets divided by 12 and added to your monthly payment.

USDA Appraisals

USDA loans require an appraisal by a USDA-approved appraiser. An appraisal assesses a home’s value to ensure a buyer purchases a property at an appropriate sale price.

The appraisal also verifies that the property meets USDA standards and is livable. Home features, like the electrical and heating systems, must work and be up to code, and the home can’t have broken windows.

The appraiser will survey for insect damage. If the home has a well or a septic system, they’ll also check to confirm it meets USDA guidelines. An appraisal isn’t an in-depth examination of all the issues in a home. If you want to know more about the condition of the home you’re buying, you should hire a home inspector.

What Types Of USDA Loans Are Available?

The USDA offers three main mortgage programs:

• USDA Guaranteed Loan: Most USDA home loans are Guaranteed Loans. Borrowers can benefit from low interest rates and zero down payments.
  
• USDA Direct Loan: Direct Loans are issued by the government directly to the home buyer. The loans are usually reserved for qualifying low-income borrowers and have interest rates as low as 1%.
  
• USDA home improvement loans: The loans are issued to qualified rural homeowners to make home repairs or improvements.

How Do USDA Loans Compare To Other Mortgage Loans?

If you aren’t sure whether a USDA loan is the right option for you, you may need to consider other loans.

USDA Loan Vs. Conventional Loan

USDA and conventional loans are both available in rural areas.

Borrowers can qualify for a conventional loan with a 3% down payment, but when you put at least 20% down, you don’t pay private mortgage insurance (PMI). PMI is added to your monthly mortgage payment until you’ve met the 20% threshold.

USDA Loan Vs. FHA Loan

While USDA loans are limited to rural areas, Federal Housing Administration (FHA) loans are available to buyers in all areas. FHA loans require a minimum 3.5% down payment with a credit score of 580 or higher. With an FHA loan, you’ll pay an upfront mortgage premium (UFMIP) that’s 1.75% of the total loan amount and an annual mortgage insurance premium (MIP) that ranges from 0.55% for a 30-year mortgage to 0.85% for a shorter-term loan based on loan-to-value ratio (LTV) and total loan amount.

USDA Loan Vs. VA Loan

The Department of Veterans Affairs backs VA loans, offering 0% down payments for qualifying active-duty service members, veterans and surviving spouses. VA loans have no annual fee, but borrowers will pay an upfront funding fee that’s 1.25% – 3.3% of a loan’s value.

USDA Loan FAQs

Still wondering if a USDA loan is right for you? Here are answers to some frequently asked questions.

Do I need to buy farmland to qualify for a USDA loan?

Not all rural areas are farmland. According to the USDA, a rural area has fewer than 50,000 people and isn’t connected to or near a metro area. However, it’s possible to live within an hour's drive of a major city and qualify for a USDA loan.

How can I apply for a USDA home loan?

You can apply for a USDA home loan through an approved lender. The lender will require a home appraisal confirming that the property meets USDA requirements.

Can I get an adjustable-rate USDA mortgage loan?

USDA loans are fixed-rate loans, meaning the loan’s interest rate never changes. There are no adjustable-rate mortgage options. If interest rates have dropped after you’ve lived in the home for at least a year, you can use a USDA Streamline Refinance to refinance your loan and get a lower interest rate.

The Bottom Line: USDA Loans Can Make Homeownership More Affordable

With lower interest rates, USDA loans help make purchasing a home more affordable for buyers who want to purchase in qualifying rural areas. Though you'll still pay closing costs, you won’t need to make a down payment. You can check if a home qualifies for a USDA loan using the agency’s online eligibility map.

While Rocket Mortgage doesn’t offer USDA loans, you can start the approval process to find the right financing for your new home.