Renters who want to buy a piece of the American Dream and get a home of their own in 2018 may want to consider a USDA loan. Did you know that USDA home loans are available with 100% financing, low mortgage rates, affordable payments, and plenty of underwriting flexibility? If you are weary of paying someone else’s mortgage, it’s time to pay your own with a USDA home loan! If you live outside the city in a rural area, it’s worth learning about the guaranteed USDA loan.
- Affordable Home Loans for Rural Areas in the US
- No Down-Payment Needed with 100% USDA Financing
- Relaxed Credit Guidelines Take the Pressure Off Your Credit History
- Competitive Interest Rates with USDA Home Loans
Keep reading to discover 2018 USDA loan requirements. You will learn what you need to qualify for a USDA home loan with no down-payment required.
General Eligibility for USDA Loans
USDA home loans are guaranteed by the USDA federal agency in Washington DC. These loans are guaranteed against default, so USDA mortgage lenders are willing and able to offer generous underwriting flexibility.
USDA home loans are available for borrowers who meet specific income and credit standards. We will dive into the USDA credit score requirements further into this article.
Qualification for a USDA loan is easier than for conventional loans. Many of these loans do not require any down payment, and you can have a very low credit score and still qualify.
The USDA requires guaranteed loan borrowers to pay for mortgage insurance. At closing, you pay 2 percent of the purchase price as an upfront fee. You also pay a monthly mortgage insurance premium of 0.40% of the loan’s balance each year. Because your loan balance decreases every year, your monthly insurance payment will drop a bit each year.
The guaranteed USDA loans were created to aid people in rural regions who have a modest or even a low income per family. Direct USDA home loans may be offered for terms ranging from 33 or 38 years.
USDA Home Loan Geographic Eligibility
One of the major criteria for these loans is that the home must be located in an area that the USDA deems to be ‘rural’ Borrowers should check the USDA website to check if the home they are interested in qualifies under USDA guidelines.
Fortunately, the home does not have to be located in the sticks to be eligible; some homes that are located on the outskirts of major cities also may qualify for a guaranteed USDA loan.
The eligibility map that USDA uses is still based upon 2000 census data. So, some homes on the map that aren’t really rural anymore still may qualify for a USDA loan.
One of the popular rural mortgage options is the USDA Section 502 Loan which is often referred to as the Home-ownership Direct Loan. With a direct guaranteed USDA loan, the US Dept. of Agriculture provides the required funds for the USDA rural loan itself through local USDA Rural Development offices.
The USDA provides down-payment assistance and home buyer grants with guaranteed USDA loans in an effort to lower the monthly mortgage payments to an effective interest rate as low as 1%. Of course, this type of down-payment assistance depend on the income of the household.
Down Payment Guidelines on USDA Loans
USDA loans, along with military VA loans, are about the only 100% finance home loans left on the market today. FHA mortgage-loans require 3.5% down, although you can get the down payment in the form of a gift.
The no money down feature of USDA loans makes home ownership a real possibility for many people in the Trump-era. Buying a home for the first time, or buying another home after a bankruptcy or foreclosure, can be tough because of a lack of equity. Having to put no money down makes it easier to get your piece of the American Dream. USDA is a popular zero-down mortgage for people looking to buy a house in a rural area of the country. The no down-payment feature is one of the most attractive benefits when considering USDA loan requirements in 2018.
USDA Income Limits
Guaranteed, 100% home financing USDA loans are available to people with ‘moderate’ incomes. USDA states that ‘moderate’ means people with income up to 115% of the median income for the area. For example, a family of four in Orange County CA can make approximately $111,000 per year and still qualify.
Many middle-class couples find that they are within the income limits set by USDA.
Note that USDA will take into consideration all of the income in the house. If you have a 17-year-old in the house with a job, that income must be disclosed to the lender. The income does not have to be on the application but the lender does need to see all income in the house when determining if you are eligible. We suggest that you check the current USDA loan requirements for income before making an offer on a rural home.
USDA Loan Terms
USDA offers both 15-year and 30-year fixed mortgages. You cannot get an adjustable rate mortgage with the USDA loan program. So, when you speak with approved rural lenders you want to compare the fixed 30-year USDA loan rates with the 15-year rate options to determine affordability and preferred pricing.
Interest Rates for USDA Home Loans
Mortgage companies and private banks make USDA loans available with low rates. USDA guarantees these loans, making it a safer and cheap way for mortgage companies and private banks to make money on home loans. The savings are passed on to you the buyer in the form of a lower interest rate.
In some instances, USDA mortgage rates are lower than current conforming rates. Check today’s USDA loan rates for current pricing and always consider the closing costs as well.
USDA Credit Scores
A major benefit of USDA loans in 2018 is flexible credit criteria. It is not necessary to have a good credit score to be approved for a guaranteed USDA loan. Today, the minimum credit score for USDA loans to be approved is 640. The average USDA loan credit score is the the high 600’s.
If you discover that your credit is not good enough for one lender, you should try several others. We continue to hear rumblings that the USDA credit requirements may be eased in 2018. Many USDA lenders are hoping the USDA credit score minimums will drop to or below 600. Before getting to excited, we suggest checking with mortgage companies to determine the USDA credit score requirements for 2018. At the end of the day, the USDA credit score minimums will vary depending upon the mortgage company and their underwriting policies on guaranteed USDA loans. Ask loan officers about the USDA credit requirements that have been updated in 2018.
Closing Costs on USDA Home Loans
USDA does allow the seller to pay for your closing costs; the limit is up to 3% of the sale price. Not every seller will agree to do so, but if you have a seller who needs to move his property, you might be able to get some of your closing costs covered.
Therefore, it is possible to get into a USDA loan, and your dream home, with little out of pocket costs!
Asset Requirements with USDA
If your seller will not cover your closing costs, you will need to pay them. You have to be able to prove that you have the cash to close the loan. This requires two months of bank statements.
Interestingly, there also is a requirement that the borrower NOT have the assets to put down 20% on the property. If you can qualify for a conventional loan, USDA will not allow you to get a loan with them. This program is designed for lower income, credit challenged people who cannot get a conventional loan. This is another attractive feature of the 2018 USDA loan requirements for first time home buyers that may have lower incomes.
Debt Ratios on USDA Loans
As of 2018, borrowers must have a debt to income ratio of no more than 29% of gross income. This means that all housing debt payments – housing, taxes, insurance and HOA – cannot exceed 29% of gross income. Total debt payments cannot exceed 41%.
However, there are some cases – such as borrowers with higher income and good credit – who can qualify for higher DTI ratios.
USDA loans are an excellent 100% financing option for people buying homes in more rural areas. Check with your USDA lender now to see if you can qualify.
How to Buy a Home in a Rural Area at a Great Mortgage Rate with the USDA
Do you feel more at home with a house in the country rather than the city or suburbs? You are not alone! Millions of Americans prefer to live in a rural area because of lower costs, higher quality of life and a more relaxed pace.
The US government likes to help people to buy homes in rural areas. That is why they have created the US Department of Agriculture mortgage program. In fact, the USDA has one of the best mortgage assistance programs for rural home buyers, and most people have never heard of it.
The USDA home loan program allows you to buy a rural home and certain suburban homes with a low interest rate and often zero down payment. This program also is called the USDA Rural Development Guaranteed Housing Loan Program.
As part of its overall rural development strategy, the USDA invests billions of dollars each year into helping thousands of American families buy their own home in rural regions of the US. This rural loan program is made to improve the quality and economy of life in rural parts of America.
People who are interested in a rural home loan should strongly think about the USDA loan program. Below is how the USDA home financing works.
3 Different USDA Mortgage Programs
There are three major home loan programs by USDA:
- USDA Loan Guarantee: This means that the USDA guarantees the home loan issued by an approved home lender. It is very similar to VA loan or FHA financing. A guaranteed loan USDA allows a zero down-payment opportunity and a low interest rate. In most cases, USDA mortgage rates are priced competitively when compared with conventional and FHA rates.
- USDA Direct loan: This program features loans directly issued by USDA. These loans are only for people with very low income. The income threshold varies depending upon the part of the country. This is a subsidized program and rates can be as low as 1%.
- Home improvement loan: This is a financial award that allows the home owner to repair a home. This program can provide you with as much as $27,500 in financial help.
To qualify for a USDA-guaranteed home loan, below are some of the typical requirements:
- US citizenship or permanent residency
- The monthly payment should be 29% or less of your gross monthly income. Any other monthly payments on debt cannot be more than 41% of your gross income. USDA will allow you to have higher debt ratios if your credit score is over 660.
- A dependable and regular income for at least the last two years
- A credit history that is acceptable. This typically will mean that you have had no accounts go to collections in the last year. If you can show that your credit score was affected by a situation you could not control, you could still qualify.
If you have a credit score that is 620 or higher, you will get your USDA-guaranteed home loan processed faster. If you have a credit score at 580 or lower, you must meet tougher underwriting requirements.
People who do not have credit may be able to qualify for this rural home loan with rental and utility payment histories.
USDA-Issued Home Loans
The USDA also issues home loans directly to people with the greatest financial need and other needs. This means that the family must meet the following criteria:
- You do not have a safe, decent or sanitary place to live
- You cannot get a home loan from a regular lender
- You have an adjusted income that is below the low-income limit in your area
USDA will usually provide you with a direct loan for a home with 1800 square feet or less, and with a market value under the loan limit for the area. These numbers can vary based upon the area. A USDA house loan could be $500,000 or more in California, and as low as $100,000 in parts of the rural US.
Homes That Are Eligible for USDA Loans
A major restriction of this program is that most metropolitan areas do not qualify. You need to be located in a rural area. But there are some suburban areas that may qualify for the USDA finance program as well.
What to Do Next for a USDA Mortgage
To apply for USDA mortgage you should talk to a approved USDA rural mortgage lender today. Keep in mind that you do not need to work in any particular industry to qualify for a rural home loan from the USDA. There are even loans for a first-time home buyer with bad credit, if the borrower meets the USDA eligibility requirements.
People who have a lower income and a lower credit score should consider a USDA home loan. You can get a very low interest rate and zero down, 100% financing in some cases. Just make sure that you are looking at homes that can qualify for a USDA loan program. Check with your real estate agent and have him or her only show you properties that can qualify for a USDA rural loan.
How to Buy a Home in a Rural Area at a Great USDA Mortgage Rate in 2018
Are you interested in buying a home in a rural area? How about with no money down? Are you searching for rates better than FHA interest rates? And how about even the ability to finance your closing costs? If this all sounds impossibly too good to be true, you would be wrong!
With a US Department of Agriculture (USDA) guaranteed rural development loan, you may be able to buy a rural home with a mortgage with all of those features.
USDA offers very attractive home loans to certain types of people in rural areas of the US. This program exists to encourage people to move into rural areas and to boost economic development across less populated parts of the US. The Department of Agriculture studies population data from the last US Census to determine which parts of the country are ‘rural.’ Buyers in those areas are then able to get a loan backed by USDA, if they qualify. Most of these loans are issued by approved USDA mortgage lenders, but a few are issued by USDA itself.
What Makes Guaranteed USDA Loans Great
USDA-backed mortgages are a great deal for buyers because you can get a loan with 100% financing, but the interest rates are often lower than already low FHA loan rates.
FHA financing is a good deal as well, but you do need to have at least a 3.5% down payment. Buyers with an FHA insured lien also must pay monthly mortgage insurance premiums.
On the other hand, USDA home loans only require a small annual mortgage insurance premium, and an upfront premium of the USDA loan amount. Both of these are significantly lower than FHA costs. The upfront costs can be rolled into the USDA loan.
- With a USDA mortgage, there is only 1% upfront guarantee fee compared to a 1.75% upfront mortgage insurance premium for FHA home loans. And just like with the mortgages offered Federal Housing Administration borrowers can finance the up-front fee in their USDA home loan.
- USDA mortgage loans have a 0.35% guarantee fee on the unpaid principal balance each fiscal year. For FHA liens, borrowers are required to pay an annual 0.85% mortgage insurance fee if they put down at least the 3.5% down-payment when they bought the house.
What’s the Catch with USDA Home Loans?
The only catch is that USDA decides who can get these loans. It is limited based upon income. If you earn more than 115% of your region’s median income, or already are in what USDA calls ‘adequate housing,’ you cannot get this loan. Also, you need to buy a home that is reasonable and modest in size, cost and design. It can be a fixer upper but it can’t be a tear down-worthy house.
You also need to have credit. The good news is that the USDA does not set a minimum credit score. But you will find that most lenders will not deal with you if your FICO score is under 620. This is a good 100 points higher than the minimum credit score needed for FHA loans. With FHA, you need to have a 500 FICO score and put down at least 10% up front.
But don’t worry – if you want a USDA home loan with poor credit, you can show the lender that you have a good bank balance. Or, show that you have reliably paid a higher rent than the home’s mortgage payments. There are bad-credit USDA loan programs available, but not all brokers and lenders will accept below-average credit, so discuss your credit scores when considering a USDA mortgage company offering rural home financing.
The most important factor is this: You have to live in an area that USDA considers rural.
Why Get a USDA Loan Now?
The USDA decides which areas are rural based upon census information. You may want to pull the trigger soon on getting a USDA loan if you are thinking about it. USDA has not updated the map it uses since 2000. Obviously, a lot of development occurred in the last 17 years. Many areas that were once rural are now suburban, and still qualify for USDA loan financing.
A 2011 study by the Housing Assistance Council found that 97% of the land mass of the US is actually eligible for a USDA loan. This land mass contains more than 100 million people. So, one in three Americans live in areas that were USDA-eligible as of 2000.
But the good times are almost over! USDA has been planning to update its map with 2010 census data. The Housing Assistance Council states that this update is going to make 7.8 million people ineligible for USDA loans, unless they move.
Some experts think that the map update is going to affect fewer people than the Housing Assistance Council estimates. USDA does not currently have data that shows how many Americans will not be living in areas considered rural after the update.
So, if you are in an eligible area now and are thinking about a USDA home loan, we recommend that you get cracking!
Takeaways on USDA Home Financing
Remember, the USDA mortgage, if you qualify, provides you with 100% financing in many cases, and you may be able to roll your mortgage insurance and closing costs into the loan. There really is not a better home loan on the market for lower income borrowers. Follow the steps outlined above to apply for a USDA loan online. As long as your credit score is 620 or higher, you should talk to your USDA lender today about rural home loan programs.
References: What Is a USDA Loan? Am I Eligible for One? (n.d.). Retrieved from https://www.nerdwallet.com/blog/mortgages/usda-loan/ & The Best Loan You’ve Never Heard Of—And How You Can Get One. (2014, July 24). Retrieved from http://time.com/money/2929695/home-loan-usda-credit-rural-development/