Many potential home buyers considering residential home financing may not have heard of USDA home loan programs. While they may not be as popular as the other government-backed FHA mortgage programs, USDA loans are also a great alternative to borrowers purchasing or refinancing residential properties in eligible rural areas.
USDA Rural Mortgages are a small, niche segment of the home lending universe. Most banks and mortgage lenders do not actively originate them.
Different USDA Home Loan Programs
- USDA Direct Loan
- USDA Guaranteed Loan
The USDA guaranteed housing loan program is also known as “Section 502 Loan”. Just like FHA loans, the approved lenders handle all aspects of the loan origination, underwriting and funding according to the USDA lending guidelines. Loans that meet the USDA requirements are then insured by the agency.
100% Mortgage Financing – Zero Down Payment
USDA may currently be the only agency or lender offering a true 100%, no down payment lending program for single-family home buyers in the country. Most of the USDA loan requirements are quite flexible and in most cases, easier than FHA programs. They carry reasonable interest rates, lengthy repayment terms, low closing costs and above all, zero down payment. If you choose to repay the loan early, you are not going to have to pay any pre-payment penalty.
The primary requirement is that the property to be financed with a USDA home loan must be located in an area designated for eligibility.
Latest USDA Home Loan Guidelines
If you want to consider getting a USDA insured mortgage, you need to be aware of the latest changes introduced recently.
The most significant change is that USDA loans will be entirely self-funded by the agency itself. Going forward, the loan funding will not be subsidized by taxpayers. This major change in how USDA financing operates has a number of implications for home buyers considering USDA rural home loan.
In a bid to handle its funding requirements to support the rural guaranteed home loans, USDA has introduced new premium rates on loans guaranteed by it. The current mortgage insurance rates (PMI / MIP) on USDA rural loans are:
- For financing new home purchases, a 2% upfront fee will be charged to the buyers. This fee must be paid at the closing on the entire loan amount.
- For those who wish to refinance to a USDA refinance loan under the streamline or regular refinance programs, a similar 2% fee will be charged.
- In addition to the upfront fees paid at the closing, an annual fee of 0.4% on the outstanding principal is also required.
For example, if you buy a 150,000 home in rural Pennsylvania, you would be making a payment of $3,000 at the closing. In addition to this, a $50 monthly PMI payment must also be paid.
To properly understand the exact amounts you need to pay upfront and on an ongoing basis, speak with the USDA approved lender handling your loan application.
USDA Rural Home Loan Programs – FAQs
The qualifying criteria, eligibility requirements and underwriting guidelines needed to obtain a USDA insured loan are easy and highly flexible. In order to get started, the most important requirement is the property you plan to buy must be located in a USDA rural area.
The following are some of the common questions related to USDA mortgages:
How to determine USDA property eligibility for the residential home you plan to buy?
USDA loans are only available for eligible properties situated in rural areas. Unlike our common perception of what we think to be rural, the USDA’s definition is quite liberal. Many areas situated close to major cities and urban areas are also designated as rural areas. To be sure that the property you plan to purchase in one of such regions, check out the detailed USDA property eligibility maps on their website. If you need further clarification, you may also contact your local USDA office.
What is the minimum required down payment for a USDA rural mortgage?
Even FHA and VA require borrowers to place at least 3% – 5% percent but not USDA. This may come as a surprise to many but USDA has no minimum down payment requirement. You can put as little as zero percent and still be eligible for a new home purchase loan through USDA rural loan programs.
Is USDA loan program only limited to first-time home buyers? Can previous homeowners qualify for financing under USDA rural loan guidelines?
There is no particular restriction on previous homeowners from seeking USDA financing for buying a new home. As long as you meet the income and credit eligibility criteria, you can apply through a USDA approved lender.
Do I have to pay the USDA upfront mortgage insurance premium from my own pocket or can it be financed into the loan amount?
The 2 percent upfront PMI required on all purchase and refinance loans insured by USDA can be financed into your new loan amount. The new PMI limits came into effect from October 1, 2012. The increased amounts were introduced as USDA aims to self-fund all its rural home loan programs unlike in the past when it was taxpayer-subsidized.
How to find USDA approved lenders to process my rural home loan application?
The USDA website has a complete list of approved lenders that can underwrite and process your loan application. If you cannot find a local lender willing to handle the loan, access the list and find a USDA lender.
What kind of loan terms and mortgage products are available for a USDA loan?
Whether you are trying for a USDA purchase loan or for refinancing, the only mortgage product available is a 30-year fixed rate loan. USDA direct loans may offer extended terms for qualifying borrowers with lower income. Other than that, USDA does not offer either the popular 15-year fixed rate loan or Adjustable Rate Mortgages (ARMs).
Are the USDA loan rates comparable to other conventional mortgage loans?
Yes. The USDA loan interest rates are highly competitive and are comparable to interest rates available for FHA mortgages, VA mortgages and loans offered by conventional residential lenders. As USDA insures the loans originated by its approved lenders against default, the risk is much lower for the originating lender. This ensures that they offer best interest rates for borrowers meeting the qualifying requirements for a USDA loan.
What are the USDA closing costs? Can they be financed into the loan or paid by the seller? Is a gift acceptable?
The closing costs for USDA home loans are similar to other government-insured residential mortgage programs such as those offered by FHA and VA.
The actual closing costs for a residential mortgage loan depends on a number of factors. The origination fees charged by the lenders vary, so does the local and state government charges. The Good Faith Estimate you receive with your filled-out loan application (1003) should give you a clear overview of all the fees you need to pay for closing on a USDA loan.
The best way to get a real idea is to ask for a concrete GFE from a few of the USDA lenders you are considering and then comparing them. The upfront USDA PMI (2%) can be financed through the loan itself.
USDA also allows borrowers to receive a gift from anyone. Even non-relatives can help you with the payment of your loan closing costs. If you are receiving a gift, get a gift letter with the necessary details. This should accompany your loan application. If you need the proper gift letter template acceptable to the underwriter, ask the loan officer processing your loan.
A seller can also offer to pay for the closing costs from their sale proceeds. The seller concessions are allowable under USDA lending guidelines. The concessions and gifts can be used to pay for typical closing costs such as origination fees, discount fees, title insurance, home inspection and government charges.
As mentioned above, you can pretty much get a USDA loan with zero down payment and no closing costs with proper planning.
Can USDA financing be used to purchase or refinance a second home or an investment property?
The USDA Rural Housing Program restricts program eligibility to single-family residential properties that are to be occupied as the borrower’s primary residence.
Second homes and investment property purchases are not eligible for USDA financing.
Is it possible to qualify for a USDA loan with low credit score?
The overall eligibility requirements for USDA loans are quite reasonable and less stringent. The lenders may require that the borrower has a decent credit score and a good repayment history. If your FICO credit score is above 640, you have a very good shot at meeting the credit requirements.
Borrowers with lesser scores may need to explain the reason for their past delinquencies and will have to provide supporting documentation. For borrowers without any significant credit history or established tradelines, alternatives such as rental payment history, utility bill payments may be used to determine credit worthiness.
Are self-employed borrowers eligible for a USDA rural mortgage?
Yes, self-employed individuals qualify under USDA employment requirements. The federal tax returns from the past two years must be submitted along with documentation related to their line of business, licenses etc.
What are the USDA loan employment history and verification guidelines?
If you are currently employed as a w-2 employee, the past job history is not required or verified. If you have been less than two years at your current job, you will not be allowed to use any bonuses you received for meeting the income qualification requirements. As long as you have a job and are paid on W-2, you should be eligible for USDA financing for a rural home purchase or refinance.
Can I refinance my existing mortgage with a USDA streamline loan? Is cash-out allowed?
No, the newly issued USDA streamline requirements stipulate that only existing USDA loans can be refinanced under the streamline program.
You can only do a rate and term refinance with a USDA refinance loan. No cash-out is allowed. If you meet other criteria and need to take cash from your home equity, consider a conventional cash-out refinance.