USDA home loans: 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. USDA loans are part of a national program created by the U.S. 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. 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:

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, but the maximum population limit for any USDA loan is 20,000. Even if you’re buying in a town that has a lower population than that, you won’t qualify for a USDA mortgage if the area is 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 website.

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

What are the eligibility requirements for a USDA loan?

The USDA loan program, like any other mortgage, has certain eligibility requirements you must meet. If you tick the following boxes, then you should be eligible for a USDA loan, if you’re buying the right kind of property:

  • You’re a U.S. citizen or a permanent resident with a Green Card
  • Ability to prove creditworthiness (typically a minimum credit score of 640)
  • The home would be your primary residence
  • You meet income requirements (see below)
  • 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

What are USDA loan fees in 2021?

USDA mortgages come with two fees that are specific to the 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 this fiscal year, which began Oct. 1, 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 this fiscal year is 0.35 percent of the loan amount. So, 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 certain income limits, which vary by metro area and family size. In more expensive areas, the income ceiling is higher.

The annual income limit for a one- to four-person household in most eligible counties is $90,350, and $119,200 for five- to eight-member households. In a higher-cost areas like San Francisco County, the limit jumps to $212,550 for smaller households and $280,550 for larger ones. The USDA sets limits at or below 115 percent of the median household income in each region, and updates them 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 a USDA mortgage calculator to estimate monthly loan payments in your area.

Pros and cons of USDA loans

The benefits of a USDA home loan include less stringent credit score guidelines and 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
  • Available for both purchasing property and refinancing
  • Often come with low, fixed interest rates

The cons mostly have to do with restrictions, like those on where you can buy or how much your family can make.

Cons

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

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