In today’s housing market, anyone looking to purchase a home with nothing down may find themselves with few options. Fortunately, USDA home loans still offer 100% financing with low mortgage rates for home purchases. And these rural development loans can be used across most areas of the country. Don’t overlook the no-down payment mortgage options offered through USDA loans.
What is a USDA loan?
USDA, which stands for the United States Department of Agriculture. Historically, USDA loans were considered rural loans or “farm loans” that were used to buy properties in agricultural areas. Today, USDA Rural Development offers USDA RD Loans and they aren’t just for farms, either. In fact, properties around most areas of the country can be purchased with a no down payment USDA home loan.
USDA loan originations surged during the past decade when the 2008 financial crisis caused a rapid demise of subprime lending. There was harsh tightening of mortgage credit requirements, and no money down mortgage options became scarce. That’s why USDA loans are so attractive. They’re the only zero-down mortgage program left for home buyers who aren’t military veterans.
What USDA loans options are available?
USDA loans offer their borrowers peace of mind and stability with a fixed mortgage rate set for 30 years. Adjustable-rate mortgages or term lengths shorter than 30 years are not offered. The interest rates for USDA guaranteed loans are provided by the lender and are usually competitive with other programs. Highlights of current USDA loan programs include:
USDA Guaranteed Loans
With a record 145,108 loans closed last year, mortgages backed by the USDA Single Family Housing Loan Guarantee are the most popular rural development mortgage option. USDA Section 502 Guaranteed Loans are available for purchase transactions only and are only available for low to moderate income families, as defined by the USDA.
Guaranteed Loans aren’t made directly from the USDA to the borrower. Instead, lenders provide the money for the mortgage and the USDA simply guarantees the loan in case of default. In that way, Guaranteed USDA home loans operate in a similar manner to other government-insured mortgage programs.
Apply for a USDA Guaranteed Loan
USDA Direct Loans
With only 7,940 originations last year, Section 502 Direct Loans are not as common as Guaranteed Loans. These loans are appropriately named “Direct” because funds travel directly from the USDA to the borrower. USDA Direct Loans are a good choice for families with low income. To be eligible for a Direct Loan, the applicant’s income must fall into the “low” or “very low” categories, as defined by USDA mortgage guidelines. Direct Loans are only available for purchase transactions.
USDA Refinance Loans
USDA refinances are only accessible by borrowers who already have a USDA home loan. This “Streamline Refinance” feature is major advantage of buying a home with a USDA mortgage because it gives homeowners the ability to refinance into a lower rate quickly and easily. USDA also offers a non-streamlined refinance program and the Rural Refinance Pilot Program for certain areas of the country.
USDA Home Loans vs. Conventional Loans:
USDA home loans offer many benefits and protections that are not included in other loan types including:
- Credit flexibility – USDA loan requirements are not totally credit score driven, although most lenders may require the borrower to have at least a 620 FICO score to obtain an approval. USDA mortgage guidelines are written with certain flexibilities that are not included in other mortgage types.
- Low monthly mortgage insurance – A distinct advantage of a USDA rural development loan, as compared to a conforming loan, is great interest rates and low mortgage insurance (MI). The daily USDA mortgage rates are usually comparable to a conforming 30-Year Fixed loan.
- No down payment – USDA mortgage loans have no down payment requirements for purchasing a home.
What factors determine if I’m eligible for a USDA loan?
To meet USDA loan qualifications, your monthly housing costs (mortgage principal and interest, property taxes, and insurance) must meet a specified percentage of your gross monthly income (29% ratio). Your credit profile and background will be considered. A FICO credit score of 620 or above is usually required for USDA approval through most lenders. You must also have enough income to pay your housing costs plus all additional monthly debt (41% ratio). These ratios may be exceeded to a certain amount if the borrower has compensating factors. Applicants for loans may have an income of up to 115% of the median income for the area. Maximum USDA Guaranteed Loan income limits for your area can be found here. Maximum USDA Direct Loan income limits for your area can be found at here. Direct Loan applicants must prove their family is without adequate housing, and also prove their ability to afford the new mortgage payments.
See more on USDA mortgage requirements.
How much can I can borrow with a USDA home loan?
When asking yourself the question “how much mortgage can I afford with a USDA home loan”, there are several factors that will give you the answer. USDA loan limits are determined by:
Maximum loan: There’s not a maximum loan amount set for USDA Loans. Instead, a borrowers debt-to-income ratios will determine how much they can afford (29/41 ratios). In addition to the debt ratios, the borrowers monthly household income must be smaller than the USDA allowed maximum income limit for your the area of the home. Maximum Guaranteed Loan family income limits for the entire country can be found at here.
Maximum financing: The maximum USDA Rural Loan amount will be 102% of the appraised value of the home (100% plus the 2% USDA loan guarantee fee).
How much is needed for down payment and closing costs?
USDA mortgage loans don’t require any money for a down payment and they also allow the borrower to place the closing costs into the total loan amount (if the home appraisal permits).
What property types are allowed for USDA mortgage loans?
While USDA mortgage guidelines do require that the property be Owner Occupied (OO), they do allow you to purchase condos, planned unit developments, manufactured homes, and single family residences.
How long do I have to wait after bankruptcy to apply?
Criteria for USDA loan approvals state that if you have been discharged from a Chapter 7 bankruptcy for three years or more, you are eligible to apply for an USDA mortgage. If you are in a Chapter 13 bankruptcy and have made all court approved payments on time and as agreed for at least one year, you are also eligible to make a USDA Loan application.