What is a USDA Loan?
USDA stands for United States Department of Agriculture. In the past, USDA Loans were considered “farm loans”, mostly used to purchase properties in agricultural areas. That is not the case with today’s USDA Loans. In fact, properties in almost every area of the country outside major metropolitan areas can be purchased with a zero-down USDA Loan today.
USDA Guaranteed Loans are the most common type of USDA loan and allow 100% financing for home purchases. USDA Guaranteed Loan applicants may have an income of up to 115% of the median household income for the area. Area income limits for this program can be viewed here. All USDA Guaranteed Loans carry 30 year terms and are set at a fixed rate.
What Factors Determine if I am Eligible for a USDA Loan?
To meet USDA loan eligibility requirements, 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 background will be fairly considered. At least a 640 FICO credit score is required to obtain a 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 can be exceeded somewhat with 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. Families must be able to afford the mortgage payments, including taxes and insurance.
What are the Advantages of USDA Mortgage Versus Conventional Loans?
USDA mortgage loans offer many benefits and protections that you won’t find in other loans including:
- USDA Mortgages have more flexible credit qualifying terms
- USDA Rural Loans require low monthly mortgage insurance (MI)
- A distinct advantage of a USDA rural 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
- USDA Mortgages require no down payment
- Lowest rates available
USDA Loan Rates: How Do They Compare To FHA & Conventional
Mortgage rates are “born” on Wall Street; based on the price of a special type of bond called a mortgage-backed security (MBS). Then, after the price of a mortgage bond is set, your mortgage lender acts as middleman between you and the MBS market, setting the final rate you get in your quote.
USDA mortgage rates are often the lowest rates available. This is because, unlike FHA mortgages and conventional loans, USDA loans are guaranteed by a government agency — in this instance, by the U.S. Department of Agriculture. Because of the USDA guaranty, lenders making USDA loans today are protected against loss in a way that loans via the FHA or any other agency cannot provide. With lower risk comes lower rates.
Only VA loans, which are backed by the Department of Veterans Affairs, offer a similar guaranty (and similarly low mortgage rates).
Can I get a USDA Mortgage Loan After Bankruptcy?
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 a 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.
What are the USDA Down Payment Requirements?
USDA Mortgages have no down payment requirement.
What Types of Property are Eligible?
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.
What is Considered a Rural Area by the USDA?
Rural areas include open country and places with population of 10,000 or less and—under certain conditions—towns and cities. There is an automated rural area eligibility calculator at: http://eligibility.sc.egov.usda.gov.
You might not be able to control mortgage rates, but you can control which lender you choose. Lenders with small markups will show lower rates. Lenders with big markups will show higher rates. Make sure to shop around for the best mortgage lender before making a decision.