Want to buy a home but don’t have the means for a down payment? The USDA Rural Development Guaranteed Housing Loan Program, also known as a USDA or Rural Development loan, is an attractive mortgage program for homebuyers struggling to overcome one of today’s biggest homebuying obstacles: saving for a down payment. But what is a USDA loan?
What's a USDA Loan?
The United States Department of Agriculture partners with approved local lenders, like Compass Mortgage, to extend home financing to eligible borrowers. This loan program is primarily designed to help individuals and families purchase a home in rural areas across the United States.
How Do Homebuyers Benefit from a USDA Loan?
USDA loans offer several perks unheard of with other loan programs. Benefits include:
- No down payment requirement. The fact this mortgage program allows homebuyers to finance 100% of their home is undoubtedly the greatest benefit. Oftentimes, first-time buyers struggle to gather enough funds for a down payment.
- Lower-than-market interest rates. USDA loans are insured by the U.S. Department of Agriculture, which gives borrowers the benefit of a low, across-the-board interest rate that does not vary based on credit score or down payment, as it does with conventional financing.
- Low monthly private mortgage insurance (PMI). Private mortgage insurance is required for any borrower with a loan less than 80 percent loan-to-value. If a borrower is taking advantage of the USDA loan’s no down payment requirement, they are required to pay monthly mortgage insurance. The upside is that the USDA’s PMI rate is one of the lowest among loan programs.
- Flexible credit guidelines. This government-backed loan also allows some borrowers with blemished or limited credit histories to qualify for home financing. Lenders may accept non-traditional credit “tradelines”, such as rent, utilities, cell phone bills, etc. to build a borrower’s credit history.
- Ability to finance upfront PMI. As with FHA loans, USDA loans also require an upfront PMI premium. The USDA allows borrowers to roll this fee into their financing and close on the loan without putting any money down.
Who Is Eligible for a USDA Loan?
To be eligible for a USDA 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. This loan program is available to both first-time and repeat homebuyers. Other eligibility requirements include:
- 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. That PITI (principal, interest, taxes and insurance) of your mortgage must be less than 29% of your gross monthly income. Additional minimum monthly debt payments, including PITI, can be no more than 41% of your gross monthly income.
- Home purchase: The 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.
As previously stated, USDA loan eligibility is determined by income, property, credit and area. To see if your location and income may meet eligibility requirements, click here. To learn more about how to get a USDA loan, contact one of our mortgage bankers.