What Is a USDA Home Loan and Is It Right for Me?

A USDA home loan is a type of mortgage that's specifically designed to help low-to-moderate-income borrowers purchase homes in rural areas. This loan program is backed by the United States Department of Agriculture (USDA).

To qualify for a USDA home loan, you must meet certain income and credit requirements. The USDA sets income limits for borrowers based on the size of the household and the area's median income.

The USDA also requires that the home you're purchasing be located in a rural area, as defined by the USDA. This means that you'll need to live outside of a city or town with a population of 35,000 or more.

The benefits of a USDA home loan include lower mortgage insurance premiums and more lenient credit score requirements compared to other types of mortgages.

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A USDA home loan is a type of mortgage guaranteed by the United States Department of Agriculture (USDA). The USDA assumes the risks of the mortgage, making it easier for people to qualify.

These loans don't require a down payment, and you don't need to pay traditional private mortgage insurance (PMI). However, there is an upfront fee of 1% of the mortgage amount that can be rolled into the loan.

USDA loans often have lower fixed interest rates than conventional mortgages. For example, as of May 1, 2023, the current interest rate for single-family homes through the USDA's direct home loan program was set at 4.125%.

To qualify for a USDA loan, your home must meet certain requirements. Here are some key details:

The loan term for a USDA loan can also be longer than a conventional mortgage. Through the guaranteed loan program, borrowers can choose a 33-year fixed-rate term.

To qualify for a USDA home loan, you must meet certain requirements. You must have an income that does not exceed 115% of the median income for the area, and you must agree to use the home as your primary residence.

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You must also be a U.S. citizen, U.S. resident, or qualified alien. For guaranteed approval, you must have a credit score of 640 or above. If your credit score is between 600 and 639, you might qualify through manual underwriting.

To determine if a home is in a USDA-eligible area, you can check the USDA website or use the USDA property eligibility map. Homes purchased with USDA loans must be located in eligible rural areas, which are defined as "open country or any town, village, city, or place, including the immediately adjacent densely settled area, which is not part of or associated with an urban area."

Here's a summary of the income requirements for USDA loans:

It's worth noting that your household income must be limited to 115% of the median income in the county where the property is located.

On a similar theme: Using Rental Income to Qualify for Conventional Mortgage

USDA loans cater to different buyers, each with its own requirements and reasons for use.

There are various types of USDA loans available, but they all share a common goal of helping low-income individuals purchase homes in rural areas.

One type of USDA loan is specifically designed for low-income families, who may struggle to afford down payments or closing costs.

USDA loans require no down payment, meaning that it is possible to finance up to 100% of the property value.

To be eligible for a USDA loan, one must meet the income restrictions for the county in which the buyer is interested.

The maximum income requirement varies by county, and the USDA Home Loan Program does allow for considerations for expenses like Child Care.

The USDA loan program is designed to help people purchase homes in rural areas, as defined by the USDA.

To be eligible for a USDA loan, the home or property that the potential buyer is looking to purchase must be owner-occupied; investment properties are not eligible.

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To qualify for a USDA guaranteed loan, you must have a credit score of 640 or above. This is the minimum credit score requirement for guaranteed approval.

If your credit score is between 600 and 639, you might qualify through manual underwriting. This means the lender will review your credit history and other factors to determine if you're eligible for the loan.

Guaranteed loans have a higher income limit of 115% of the median income for the area. This is a significant difference from direct loans, which have an income limit of 100% of the median income.

Direct loans, on the other hand, are for borrowers who have limited income and resources. They must not have safe, decent, and sanitary housing, and must not be able to obtain a mortgage from other sources.

Here's a summary of the key differences between guaranteed and direct loans:

Keep in mind that these are the main differences between guaranteed and direct loans. It's essential to review the specific requirements and qualifications for each type of loan to determine which one is best for your situation.

Income Requirements are a crucial aspect of qualifying for a USDA loan. To be eligible, your household income cannot exceed 115% of the average median income (AMI) in the county where you're looking to buy.

You can check the AMI in your area on the USDA website. The income limit varies by metro area and family size, and in more expensive areas, the income ceiling can be as high as six figures.

For a USDA guaranteed loan, your household income must not exceed 115% of the median income for the area. For a direct loan, your income must be at or below the low-income limit for the area.

Here's a breakdown of the income limits for different types of USDA loans:

You'll need to provide documentation such as paystubs, tax statements, and bank statements to prove your income.

For your interest: Mortgage Loans Based on Bank Statements Not Taxes

The USDA doesn't set a blanket credit score requirement for all borrowers, but it's generally recommended to have a score of at least 640 to qualify for a USDA loan.

USDA-approved lenders typically look for a credit score of 640 or better for USDA guaranteed loans. This is because they want to ensure the borrower can repay the loan.

The USDA uses alternative methods to evaluate borrowers without credit scores, so you don't necessarily need a credit score to qualify. However, having a good credit score can make the process easier.

Here's a comparison of credit score requirements for different types of USDA loans:

To qualify for a USDA loan, your loan must be used to buy a primary residence in a USDA-approved area. Homes purchased with USDA loans must be located in eligible rural areas.

Most people associate USDA loans with rural areas, but that's not entirely accurate. Towns and suburbs with a population of under 35,000 may qualify, as well.

To see if a house is in an eligible area, you can type the address into the USDA property eligibility map. This is the easiest way to find out if a home is in a USDA-eligible area.

Additional reading: What Amount of Home Loan Can I Qualify for

USDA loans offer a unique advantage to homebuyers in rural areas, allowing them to finance up to 100% of the property value with no down payment required.

This means that eligible homebuyers can purchase a home without having to save for a down payment, making homeownership more accessible to those who may not have had the financial means otherwise.

To qualify for a USDA loan, you must be purchasing a property in a rural area, as defined by the USDA, and meet the income restrictions for the county in which you're interested.

Each county has a maximum Income Requirement, and the USDA Home Loan Program does allow for considerations for expenses like Child Care, which can help make homeownership more affordable.

Here are the key requirements for USDA loans:

USDA home loans offer several benefits and advantages that make them an attractive option for homebuyers.

One of the biggest advantages of USDA loans is that no down payment is required, making them an excellent choice for those with limited savings.

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USDA loans also come with lenient credit score requirements, with a minimum score of 660 usually required, but lower scores can be accepted with strong compensating factors.

To qualify for a USDA loan, you must intend to live in the home as your primary residence, and it cannot be used as an investment or vacation property.

USDA loans offer 100% financing with zero down, no cash reserve requirements, and low, fixed-interest rates, making them a great option for those who want to buy a home without breaking the bank.

Here are some of the key benefits of USDA loans:

To apply for a USDA loan, you'll first need to determine if you qualify by checking the USDA website's income eligibility chart. If you meet the income requirements, you'll need to find a property that meets the location requirements, which means it must be in a USDA-qualified rural area.

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To find a USDA-approved lender, you can choose a trusted partner like First Bank and Trust, which has experience guiding borrowers through the process. You'll need to submit paperwork about your finances, including income, assets, and debt, and undergo a credit check.

Here are the steps to secure your rural development loan:

To apply for a USDA loan, you'll first need to determine if you qualify. Consult the USDA property and income eligibility maps to see if you meet the parameters. If you do, you can consider whether you'll want or need a guaranteed or direct loan.

Guaranteed loans have stringent income limits, and you'll apply for one through a USDA-approved lender. Direct loans, on the other hand, are reserved for lower-income borrowers who lack access to safe housing or other financing sources, and are obtained directly through the USDA.

To determine your eligibility, you'll need to check the income eligibility chart on the USDA website. If you qualify, you'll need to find a property that meets the location requirements.

Related reading: Commercial Real Estate Mortgages

Here are the steps to apply for a USDA loan:

If you're not approved, you can try applying for a USDA direct loan through the USDA's Rural Development office.

If you're considering applying for a mortgage with PNC Bank, you can start by applying online for personalized rates, including fixed-rate and adjustable-rate mortgages. This will give you an idea of what you're eligible for.

PNC Bank offers a wide range of loan options, such as conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan, and Medical Professional Loan. You can choose from loan terms of 10 – 30 years.

To qualify for a mortgage with PNC Bank, you'll need a credit score of at least 620. If you're planning to move into a new home and qualify for a USDA direct loan, you may be eligible for a $5,000 grant to help with closing costs.

For more insights, see: Federal Home Loan Bank Affordable Housing Program

The fees and costs associated with a USDA home loan can be a bit overwhelming, but don't worry, I've got the lowdown.

The upfront guarantee fee for a USDA loan is 1% of the loan amount, which can be rolled into the mortgage. The annual fee is 0.35% of the loan amount, paid monthly.

You'll also need to cover regular mortgage costs like origination fees, which usually cost around 1% of the loan amount, and title insurance and services, which can vary depending on the closing attorney or settlement or title company.

Here's a breakdown of the fees you can expect:

Keep in mind that these fees can add up, so it's essential to factor them into your overall budget when considering a USDA home loan.

The cost of a USDA loan can be broken down into several components. The upfront guarantee fee is 1 percent of the loan amount, which can be rolled into the mortgage instead of paying it out of pocket.

USDA loan fees are charged to the lender, who then usually passes the cost on to the borrower. These fees keep USDA loans subsidy-neutral, meaning that any losses incurred by the program are paid for by these fees instead of taxpayer dollars.

The annual fee is 0.35 percent of the loan amount. A $100,000 mortgage, for example, would have a $1,000 one-time payment (the upfront guarantee fee) and a $350 per year ongoing payment for the life of the loan.

You'll also need to cover regular mortgage costs, such as the origination fee, which is usually around 1 percent of the amount you're borrowing.

Here are some additional costs you may incur:

In high-cost areas, the maximum loan limit for USDA mortgages from private lenders is higher than the standard limit of $398,600. You can check the USDA's area loan limit map to find the limit in your area.

The rates for USDA loans are quite competitive. As of June 1, 2024, the current rate for a USDA Single Family Housing Direct Loan is 4.75 percent for borrowers who qualify.

This rate is significantly lower than the national average for a conventional 30-year mortgage loan, which is around 7 percent. It's a great option for those who meet the qualifying criteria.

USDA guaranteed loans have rates that are more similar to standard interest rates, but they can still be competitive, sometimes even 75 basis points lower. However, the actual rate will depend on the lender, so it's essential to shop around.

Flagstar Bank offers a wide range of loan options, including conventional, FHA, VA, USDA, jumbo, renovation, and more.

You can apply online for rates and choose from various loan terms, such as 15-year and 30-year fixed-rate loans, as well as 5-year, 7-year, and 10-year intro period for adjustable-rate loans.

The minimum credit score required for conventional loans is 620, while Destination Home Mortgage requires a score of 600.

Down payments vary by loan type, with 3% required for conventional loans and 0% for VA, USDA, and Destination Home Mortgage loans.

Flagstar Bank's website offers personalized rates and an online application portal, making it easy to complete the closing process on your mobile device or desktop.