Mortgage 101: How to Get a USDA Loan

Posted by Laine Smith on 8/15/16 12:58 PM

Topics: First Time Home Buyer USDA Loans Loan Types home buying

Looking to purchase a home without the means for a down payment? A USDA loan, formally known as the USDA Rural Development Guaranteed Housing Loan program, is an attractive program for homebuyers struggling to overcome one of the largest obstacles to achieving homeownership: down payment.

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Undoubtedly, the greatest feature of this program is its option for “no money down” financing, meaning homebuyers can finance 100 percent of their home purchase at an interest rate typically lower than average market rates.

USDA loans are insured by the U.S. Department of Agriculture. The USDA partners with approved local lenders, like Compass Mortgage, to extend home financing to eligible borrowers. The USDA loan program is used primarily to help individuals and families purchase a home in rural areas across the United States, providing several benefits unheard of with other loan types.

Benefits

  • No down payment
  • Lower than market interest rate
  • Ability to finance upfront private mortgage insurance (PMI) into the loan
  • Low monthly PMI rate
  • Flexible credit guidelines allow some borrowers with blemished credit histories to still qualify for a home loan

Eligibility

To be eligible for this loan, you typically must live in a small town – often rural or suburban with a population of less than 20,000 – and be able to show that your income is sufficient enough to make your monthly mortgage payments.

  • Income: Income eligibility varies by state, county and family size. Your household income must be less than 115% of the area’s median income.
  • Debt-to-Income: As with any loan, your lender will review your debt-to-income ratio to determine your likelihood of repaying your loan. The PITI (principal, interest, taxes and insurance) of your mortgage must be less than 29% of your monthly income. Additional minimum monthly payments on debt, including your PITI, can be no more than 41% of your monthly income.
  • Credit score: A credit score of 640 or higher is desired.
  • Purchase: USDA will fund a maximum loan amount of $417,000, depending on income of the borrower(s). Rural Development loans cannot be used to finance the purchase of a farm property, second home or investment property.

Speak with one of our loan officers about your eligibility for a USDA Rural Development Guaranteed Housing Loan. As previously stated, income and property eligibility will vary by county and state. For more information on eligibility in your area, visit http://www.rurdev.usda.gov/Home.html.

Interested in learning about all of your loan options as a homebuyer? Check out our Mortgage 101 Handbook for a go-to guide of the home buying and home financing process.

Download: Mortgage 101 Handbook

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