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What is a USDA Loan?

Am I Eligible for One?

USDA loans are zero-down-payment mortgages for rural and suburban homebuyers. They’re mainly for borrowers who aren't wealthy and can’t get a traditional mortgage.


Perhaps you feel more at home surrounded by pastures than pavement. If so, buying a home might be well within reach, thanks to the U.S. Department of Agriculture mortgage program. In fact, the USDA might have one of the government’s least-known mortgage assistance programs.


A USDA home loan is a zero down payment mortgage for eligible rural and suburban homebuyers. USDA loans are issued through the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, by the United States Department of Agriculture.


USDA loans are popular among today’s home buyers because the USDA program offers no money-down financing. Home buyers can finance 100% of a home’s purchase price; and, can even use the loan to help purchase a manufactured home or a modular home.


Furthermore, because USDA loans are guaranteed against loss by the U.S. Department of Agriculture, they are of very little risk to banks which make them. Low risk brings low rates and this is why USDA mortgage rates today are often the lowest of all of the government-backed mortgages.


USDA mortgage rates are typically lower than the rates for FHA loans, VA loans, and conventional mortgages via Fannie Mae and Freddie Mac.


Lastly, the USDA loan program offers reduced mortgage insurance premiums (MIP) to its borrowers. The annual USDA mortgage insurance premium — at just 0.35% of the loan amount — is 40% lowerthan the MIP charged for a comparable FHA-backed loan.


USDA loans can be big money-savers, and they’re available to first-time home buyers as well as repeat home buyers. Homeownership counseling is not required to use the USDA home loan program.


Most closings can happen in 45 days or fewer.


USDA mortgage requirements


The USDA mortgage is backed by the U.S. Department of Agriculture, and partially funded by the borrowers which use the program. Via mortgage insurance premiums charged to program homeowners, the government is able to keep the Rural Housing Loan program affordable.


The USDA last changed its mortgage insurance rates in October 2016. Those rates remain in effect today, September 28, 2018.


Today’s USDA mortgage insurance rates are:


  • 1.00% upfront fee paid at closing, based on the loan size
  • 0.35% annual fee, based on the remaining principal balance


As a real-life example of how USDA mortgage insurance works, let’s say that a home buyer in Cary, North Carolina is borrowing $200,000 to buy a home with no money down.


The buyer’s mortgage insurance costs include a $2,000 upfront mortgage insurance premium, plus a monthly $58.33 payment for mortgage insurance. You can choose the add the upfront mortgage insurance to your loan amount so you needn’t pay it out-of-pocket.

Note that the USDA upfront mortgage insurance is not required to be paid as cash. It can be added to your loan balance for you to reduce your funds required at closing.

USDA loan income requirements

USDA loan income requirements

Via its Rural Housing Loan, the USDA offers 100% financing at very low mortgage rates in rural and suburban neighborhoods.

Even better is that underwriting approvals are more flexible. Applicants don’t need to meet everyrequirement to the last letter in order to secure loan approval.

However, there is one area in which the USDA is unyielding.

The USDA will not guarantee a mortgage for a household which exceeds its maximum income limits for a given area. This is because the USDA program’s purpose is helping those with “modest means” achieve homeownership.

To be eligible for the USDA financing, then, the agency states that a household’s annual earnings must not exceed the median household income for the area by more than 15 percent, with an allowance for the size of your household.

For example, the USDA income limit for an 8-member household is higher than the USDA income limit for a 4-member household; just as the income limit for a 10-member household will be higher than the income limit for an 8-member household.

USDA income limits have a floor, based on household size:

  • 1-4 member household : $75,650
  • 5-8 member household : $99,850

Note that USDA income limits vary by area, though. In San Francisco, California, where the cost of living is among the highest in the nation, the 2017 USDA income limits for a 1-4 member household is $153,400, and $202,500 for a household of eight.

USDA income limits in Raleigh, North Carolina start at $91,850.

Households of more than 8 members can add eight percent for each additional member to their 1-4 member household USDA income limit.