Leveraging one’s borrowing power to purchase a home is often the best financial choice for most individuals. Using a mortgage to buy real estate eliminates the need to save up a significant amount of cash for the transaction. However, buying a home still requires some cash on hand, as well as a healthy credit score and history, steady income, and the ability to repay a long-term loan.
While several different home loan options exist for prospective homebuyers, not every mortgage is the perfect fit. It is necessary to evaluate the loan programs available and understand how they work before selecting the right one for the job. One of the most overlooked home loan options is the USDA mortgage.
Through the United States Department of Agriculture, some prospective homebuyers have the ability to qualify for a low to no down payment home loan with less stringent credit requirements than conventional mortgage options. The USDA home loan program offers several features not available through other mortgage loans.
However, there are drawbacks and limitations which should be considered as well. Let’s start with the basics.
What is a USDA Home Loan?
A USDA home loan is a mortgage program for eligible buyers in qualified locations, backed by the US government. Through the Department of Agriculture, certain borrowers may qualify for a home loan with no down payment requirement, a relatively low interest rate, and a fixed 30-year repayment term.
The USDA home loan programs were initially designed to help lower-income individuals purchase a residential property in areas of the country that are considered rural. Similar to how the Department of Veterans Affairs backs VA home loans, USDA mortgages are issued through certain lenders through the USDA Rural Development Guaranteed Housing Loan Program.
Single-Family Housing Programs from the USDA
A few different loan options exist under the USDA single-family housing program.
a. Single-Family Housing Direct Loans
The USDA Single-Family Housing Direct Loan Program is available to lower-income borrowers with low interest rates, no down payment, and flexible credit requirements, issued directly by USDA.
b. Single-Family Housing Guaranteed Loan Program
The USDA Single-Family Housing Guaranteed Loan Program is available to moderate-income borrowers, provided through approved lenders and offers low down payment requirements, low interest rates, and flexible credit criteria.
c. Single-Family Housing Repair Loans & Grants
Current low-income homeowners may qualify for assistance through the USDA Single-Family Housing Repair Loans & Grants Programs to make improvements or repairs to their current single-family homes in rural areas.
What are the Eligibility Requirements for a USDA Mortgage Loan?
The USDA home loan program is one of the most under-utilized housing programs throughout the country. Part of the reason behind its minimal use is a lack of understanding about qualification requirements for getting a mortgage through a USDA program. The most basic requirements are below.
- Must be a US citizen
- Must have a steady income and have proof of income for at least the last two consecutive years
- An ability and willingness to repay the amount borrowed, proven by a strong credit history with no missed payments or collections accounts within the last year
- A low debt-to-income ratio
- A low income, typically no more than 115% of the median income in the area where the property is located
- Residential property located in a rural area as designated by the USDA
Some of the requirements, such as the debt-to-income ratio, vary by lender. However, these are the basic criteria that need to be met before becoming eligible for a USDA home loan.
Down Payment Requirement for USDA Home Loans
One of the biggest benefits of the USDA home loan program is the low down-payment requirement. For many borrowers, no down payment is needed to qualify for a USDA mortgage, no matter the program used. However, individuals who have higher assets like savings or investment accounts may be required to contribute toward a down payment.
Borrowers are still on the hook for paying closing costs with USDA mortgage loans, but the elimination of the down payment need makes homebuying more affordable for many.
Credit Score Minimum for USDA Home Loans
Although there is no stated credit score minimum for a USDA home loan, many lenders impart their own requirements on borrowers. It is standard to need a minimum credit score of 640 to qualify for a USDA mortgage.
Borrowers with a lower credit score may still qualify with select lenders. However, additional information about credit history and past credit issues may be required as part of the application process.
Debt-to-Income Ratio Requirement for USDA Home Loans
Similar to credit score minimums, there is no stated maximum debt-to-income ratio necessary for USDA home loan borrowers. Lenders, however, typically want to see a debt-to-income ratio of no more than 43%.
Borrowers who are above this threshold based on their current income and debt obligations may want to work toward paying down debt balances prior to applying for a USDA home loan.
Location Requirements for USDA Home Loans
Above and beyond the basic requirements to qualify for a USDA mortgage, the property a borrower wants to purchase with a USDA mortgage must meet certain criteria.
First, USDA requires properties to be located in a designated rural area. Typically, this is defined as a community that has a population of less than 20,000. Some rural areas may include a population size of up to 35,000, and a handful of suburban areas also qualify.
The USDA maintains a database of eligible rural and suburban locations via its website. Borrowers can type in the address of a property to see if it qualifies under these location guidelines.
Income Limits for USDA Home Loans
In addition to location requirements, borrowers interested in utilizing a USDA mortgage must meet certain income requirements. The USDA loan program was designed to help low-income borrowers make home-buying more affordable.
To achieve this goal, individuals or families applying for a USDA mortgage must show an economic need. Adjusted gross income, therefore, cannot be more than 115% of the median income in the area where the property is located.
Other Eligibility Criteria for a USDA Home Loan
Finally, homebuyers utilizing the USDA Direct Loan program may need to provide proof of other qualifying factors. These include:
- Being without decent, safe, and sanitary housing
- An inability to obtain financing from other lenders or resources
- Utilizing the property as a primary residence
- Be in good standing with other federal programs
Additionally, properties must be single-family homes that are generally 2,000 square feet or less.
USDA Home Loan Limits
Similar to other home loan options, USDA mortgages come with loan limits. This means homebuyers cannot borrow more than the stated limit based on the location of the property.
In the majority of the country, USDA home loan limits max out at $336,500. However, in some high-cost areas that still meet the rural designation, a higher loan limit of $970,800 may apply.
Benefits of USDA Home Mortgage Loans
The most compelling benefits of utilizing a USDA home loan to purchase a home include the low to no down payment requirement combined with competitive fixed interest rates on a 30-year repayment term.
For the Direct Loan program, borrowers with low income may also qualify for a subsidy that provides for an even lower interest rate – as low as 1% – and a repayment term extended to 33 or 38 years.
These additional features are only available to those who show an economic need based on income, as well as qualify based on the amount of the purchase price of the home.
Drawbacks of USDA Home Mortgage Loans
Although there are many notable advantages to using a USDA mortgage, a few caveats exist. Here are the most noteworthy.
– Guarantee Fee Requirement
Anyone who qualifies for the USDA Single-Family Guaranteed Loan Program is required to pay an upfront guarantee fee as well as an annual loan fee.
The upfront guarantee fee amounts to 1% of the loan amount. For example, a $150,000 mortgage would come with an initial $1,500 guarantee fee. In most cases, the fee is added to the total loan amount or paid as part of closing costs.
The annual fee for this type of USDA loan is 0.35% of the loan amount. This fee is paid as part of the monthly mortgage payment for the life of the loan.
– Limited Eligibility
As mentioned, USDA loans for buying a residential property are designed to help those with a financial need. For this reason, borrowers have strict criteria they must meet in order to qualify.
Income limits, loan limits, and credit requirements all make USDA loans more difficult to qualify for than other home loan options.
– Appraisal Requirement
Borrowers using a USDA mortgage are also required to acquire an appraisal on the property. While this is standard practice among most home buying transactions, the appraisal must be completed by an FHA-licensed appraiser for all USDA mortgage loans.
– Fewer Lenders
Not all lenders offer USDA mortgages, regardless of the eligibility of the borrower. Homebuyers may need to dig a little deeper for the best-fit lenders compared to using a conventional, VA, or FHA home loan.
Comparing USDA Loans to FHA, VA, and Conventional Mortgages
| Conv. Loan | FHA Loan | VA Loan | USDA Loan | |
|---|---|---|---|---|
| Down Payment | 3% | 3.5% | $0 | $0 |
| Credit Rqmts. | 620 minimum credit score | 580 minimum credit score | No minimum credit score | 640 minimum credit score |
| Loan Limits | $647,200; adjusts annually | $420,680 – $970,800; adjusts annually | None with full ent. Same as county limits for partial ent. | $336,500 in most areas and income limits apply |
| Private Mortgage Ins. | Yes, if less than 20% down | Yes, 0.45 – 1.05% annually; 1.75% upfront | None | No, but guarantee fee of 0.35% annually; 1% upfront |
| Borrower Eligibility | High credit score and low debt-to-income ratio | Less stringent rqmts. than conv. loans | Military service-member, veteran, or eligible spouse | Income & location limits; higher credit score |
3 Top USDA Home Mortgage Lenders
1. Freedom Mortgage
As a top residential lender, Freedom Mortgage has been a longstanding leader in providing quality, affordable home loans to eligible borrowers for the last few decades. Freedom Mortgage offers both USDA home loans and USDA streamline refinance loans with easy credit terms, competitive interest rates, and faster closings than many other lenders.
Freedom Mortgage also provides expert guidance on the type of home loan best suited for an individual borrower. Applicants can quickly receive a personalized quote including interest rate, repayment term, and credit requirements by visiting the lender online.
2. Watermark Home Loans
Another online lender offering a variety of home loan options to borrowers is Watermark Home Loans. As a mortgage lender serving customers throughout the country, Watermark Home Loans offers USDA purchase mortgages alongside other offerings like FHA, VA, and conventional products. The lender offers an easy online quote process as well as live customer service support to help determine the right loan for the situation.
Borrowers can also rest assured that Watermark Home Loans will provide exemplary service, competitive interest rates, and credit flexibility with USDA mortgage options for qualified borrowers.
3. PNC Bank
As a nationally recognized financial institution, PNC Bank is a leader in providing a seamless home loan experience. PNC Bank currently offers rural housing mortgage products through the USDA home loan programs to qualified borrowers. As with other USDA home loan lenders, PNC promises no down payment requirements, competitive interest rates, and the ability to roll the initial guarantee fee into the loan amount.
PNC also offers borrowers the ability to get a quote quickly online. Prospective homebuyers also have an opportunity to refinance into a USDA home loan, or evaluate other mortgage options including VA, FHA, jumbo, and conventional loan solutions.
Final Thoughts on USDA Home Mortgage Loans
Although the USDA home loan programs are not available for every property or every borrower, a mortgage backed by the USDA can be a viable option for certain homebuyers.
Individuals with low to moderate-income looking to purchase in a rural or qualified suburban area can benefit from a USDA mortgage in many ways. Low to no down payment options, less stringent debt-to-income ratio criteria, and low competitive interest rates with a fixed term make USDA mortgages a smart choice for those who qualify.
If you have any questions or comments regarding our USDA home loan guide, please don’t hesitate to leave them below.
