USDA mortgages: What you need to know

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A USDA home loan is a no-down-payment mortgage for low- and moderate-income homebuyers in largely rural areas. This is a national program created by the United States Department of Agriculture to help fund loans for first-time homebuyers or people who don’t meet conventional mortgage requirements.

The benefits of a USDA mortgage include no down payment and looser credit requirements for borrowers. Some drawbacks are that the property must be located in a USDA-approved area and borrowers cannot exceed income limits.

Here we’ll cover the basics of USDA loans, including:

  • Properties that qualify for USDA loans
  • USDA loan eligibility requirements
  • Minimum down-payment
  • Income conditions

What type of property is eligible for a USDA loan?

Homes purchased with USDA loans must be located in eligible rural areas. The USDA defines these areas as “open country or any town, village, city, or place, including the immediate adjacent densely settled area, which is not part of or associated with an urban area.”

The population requirements differ depending on the characteristics of the property. The maximum population limit is 20,000, as long as it’s rural and not within a metropolitan statistical area (MSA). It also must be in an area with “a serious lack of mortgage credit for lower and moderate-income families,” according to the USDA.gov website.

The easiest way to find out if a home is in a USDA-eligible area is to check the USDA.gov website here.

What are the eligibility requirements for a USDA loan?

The USDA program is like any home loan option, there are certain eligibility requirements you must meet. If you tick the following boxes, then you might be eligible for a USDA loan:

  • You’re a U.S. citizen or a permanent resident with a Green Card.
  • The home would be your primary residence.
  • You meet income requirements.
  • You’re in good standing with all federal programs.
  • You can provide history or proof of on-time payments for bills such as rent or car loans.
  • The property is located in an eligible area.
  • Borrowers with assets that exceed USDA limits might be required to make a down payment.

What are USDA loan fees in 2020?

USDA mortgages come with two fees that are specific to this loan program: an upfront guarantee fee and an annual fee. Both of these fees are charged to the lender who then, usually, passes the cost on to the borrower.

The reason for both of these fees is to keep USDA loans subsidy-neutral, which means that any losses incurred by the program are paid for by these fees instead of taxpayer dollars. Depending on the needs of the program, the fees can change annually.

The upfront guarantee fee for fiscal year 2020, which runs from October 1, 2019 through September 30, 2020, is 1 percent of the loan amount. This fee can often be rolled into the mortgage, instead of paying it out of pocket. The annual fee for FY 2020 is .35 percent of the loan amount. Thus, a $100,000 mortgage would have a $1,000 one-time payment and a $350 per year ongoing payment for the life of the loan.

Other USDA mortgage costs might include:

  • Origination fees
  • Loan application fee
  • Title insurance
  • Processing or underwriting fees
  • Credit report and notary fees
  • Appraisal
  • Discount points (if you choose to purchase these)

What are the income requirements for a USDA loan?

The USDA loan program is geared toward low- and moderate-income homebuyers. For this reason, applicants can’t earn more than the income limits set by this federal program. These limits vary by metro area and family size. In more expensive areas, the income ceiling is higher. The income limits also change with family size, so for families that have more members the income limit rises proportionately.

In May 2020, the USDA increased baseline income limits in most counties. The annual income limit for a one- to four-person household is now $90,300 or $119,200 for five- to eight-member households. In a higher-cost city like Los Angeles, for example, the limit jumps to $131,100. The USDA sets limits at or below 115 percent of the median household income in each region. These are updated annually.

It’s important to check the maximum income limits for your family size and where you live to get the most accurate data. You can also access the new USDA mortgage calculator to estimate your monthly loan payments in your area.

Pros and cons of USDA loans

The benefits of a USDA include things like less stringent credit-score guidelines and the no-down-payment requirement. It can be a great program for homebuyers on a budget that are flexible about where they live.

Pros:

  • No down payment required
  • Lenient credit-score requirements
  • Seller can pay the closing costs
  • USDA loans are available for both purchasing and refinancing property
  • They often come with low fixed-interest rates

The cons fall under this theme: restrictive. There are restrictions on where you can buy as well as income restrictions.

Cons:

  • Strict guidelines around where property is located
  • Must use home for primary residence
  • Limiting income requirements

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