The USDA Rural Housing program basics are pretty much the same from lender to lender. But a trained expert will know how to quickly identify if the areas you’re shopping are eligible (this program can only be used in areas designated as rural by the USDA) and if your income is within the limits for that area (there are income limitations for the different versions of the program). You will likely be surprised by some of the areas that are USDA eligible, so it is certainly worth exploring. USDA still offers 100% financing for eligible homebuyers, great for first-time buyers.
In this post, we will cover the basic information areas and eligibility along with some helpful information regarding each individual program so you can quickly identify which version is best for you.
- The USDA loan program is NOT exclusively for first-time buyer program
- Contrary to popular belief, the USDA program not restricted to first-time buyers only. First-time buyers are typically defined as a person who hasn’t owned a house in the last 3 years. You can use the USDA loan program if you’ve owned in the last 3 years, but you typically cannot own more than one home at a time. Some exceptions apply, such as a job relocation or owning a home in another area.
- The USDA is not for farm land
- Many people mistake the USDA program as a farm loan. Not only is not a farm loan, you cannot use this program on an income producing property. It is for regular homes outside the highly-populated metropolitan areas. Many buyers are surprised to learn that many suburban locations even in Florida, California, Arizona, Texas, Georgia are still approved.
- The USDA loan program is a zero down loan program
- No loan amount limits, you qualify based on your debt to income ratios
- You can buy using the USDA program with no money down. What’s best is the affordable rates and low costs are not impacted by the size of your down payment. Whether you put a small or large down payment, the loan rate, and government fees stay the same.
There are two USDA programs, the 502 Guaranteed program, and the Direct program. The Direct program also has variations to it and it offered only in-house by USDA. Since the 502 Guarantee is the most widely used program and for moderate income households, we will cover specifics of the Guaranteed program.
The USDA 502 Guaranteed Program
The Guaranteed program is offered by select approved lenders, banks and brokers. The programs offers only a 30-year fixed loan program that allows zero money down. Home buyers can choose to put down money if they like. The homebuyer’s income must be equal or less than a pre-determined percentage of the median income in the area. If a homebuyer’s income exceeds the limit but has child care expenses, they can use the expenses to reduce/offset their calculated income to qualify. Also, the income limit is based on the area and also the size of the household, so a family of 6 can have a higher income than a family of 4 and still qualify. Here are some bullet points on this program:
- 30-year fixed loan with no money down
- Very low-interest rates (usually very similar to FHA or VA loan rates)
- Easy credit guidelines ( 620 credit required)
- USDA debt to income ratios: The programs will allow a home buyer to slightly exceed the debt-to-income ratios limits with strong loan compensating factors. USDA is no different. If you’re buying a home built to newer, energy-efficient code or have strong credit or assets, the USDA will allow you to buy a little more than the written debt-ratios state.
- Income limits are around the average income of the area, so many will qualify
- There is no early payoff fees or recapture fee (move and sell your home anytime)
- Lenders may be able to combine with state assisted programs, such as down payment assistance
A good candidate for the USDA loan is usually a buyer who makes the average/median income for the area and is looking to buy in a rural area. Since there are no restrictions on selling and you may qualify for other programs, I usually recommend this program if the buyer can afford a home using this program. Most of the best benefits of the USDA loan is the low costs. The USDA charges an annual fee and upfront fee similar to FHA loans, but the costs are substantially less. Comparably, a home purchased on a USDA loan with no money down has a substantially lower payment than an FHA loan with 3.5% down using the same interest rate. Here is an example:
$175,000 Price – property taxes and home insurance costs are NOT included as this would be the same for both scenarios.
3.75% rate (NOTE: This rate is not an advertised rate, it is used for this example)
$3.5% or $6,125 down payment
$168,875 Base Loan Amount (Before the government adds their fees)
$171,830 Final Loan Amount with upfront Mortgage Insurance (1.75% FHA fee that is rolled into the loan)
Total Monthly payment with monthly mortgage insurance included = $917.45
100% Financing OR $0 DOWN PAYMENT
$175,000 Base Loan Amount
$179,812 Final Loan Amount with upfront Guarantee Fee (2.75% USDA Guarantee fee that is rolled into the loan)
Total Monthly payment with monthly mortgage insurance included = $907.66
A few important things to note:
- The USDA payment is cheaper even without a down payment. If you look at a “true” comparison with USDA and 3.5% down payment, the savings would be even higher.
- Starting October 2016 – both the USDA one-time Guarantee Fee of 2.75% and the monthly mortgage insurance costs will be going DOWN. The new USDA guarantee fee will be only 1% of the loan amount (down from 2.75%) The new annual fee (monthly PMI) will be reduced from .50% to .35%. All of this combined will increase the monthly payment savings even more.
Keep in mind the FHA loan is still a fantastic option for home buyers that do not meet the income or location requirements USDA has in place.
Applicants that have questions about applying can call us at ph: 800-691-8826 7 days week. Please also be sure to submit the Quick Contact form on the right side to expedite your request. USDA Mortgage Hub serves buyer in all 50 states.