The U.S. Department of Agriculture guarantees USDA loans. The program’s official name is USDA Rural Development Guaranteed Housing Loan Program, or the “Section 502 loan”, for its place in the USDA charter.
These loans are popular among today’s home buyers because the USDA program offers no money down financing.
The name “Rural Housing Loans” for USDA loans is a bit misleading. Rural areas qualify for USDA, however, many suburban areas are eligible.
Just because you see no cows, it does not mean that the government doesn’t consider it rural This is very common in Florida, and that is why you should check the USDA eligibility map first.
Homeowners can finance 100% of the home’s purchase price; and, can even use the loan to help purchase a manufactured home.
Additionally, the U.S. Department of Agriculture guarantees USDA loans against loss, so they are of very little risk to the banks which underwrite them, so they have a very attractive interest rate.
Low risk equals low rates and this is why USDA mortgage rates are the lowest of all the government-backed mortgages.
Another hidden benefit is that USDA Loans have the lowest MI (Mortgage Insurance) when compared to an FHA Loan.
USDA mortgage rates are typically lower than the rates for FHA loans, VA loans, and conventional mortgages via Fannie Mae and Freddie Mac.
The annual USDA mortgage insurance premium — at just 0.35% of the loan amount — is 40% lower than the MIP (Mortgage Insurance Premium) charged for a comparable FHA-backed loan.
USDA loans can be big money-savers, and they’re available to first-time home buyers as well as repeat home buyers.
Homeownership counseling is not required to use the USDA home loan program. Most closings can happen in 45 days or fewer.
What Is USDA Eligibility?
The basis for USDA eligibility combines household size and geography, in addition to the typical mortgage approval standards such as income and credit score verification.
Eligibility for a 1-4 member household requires annual household income to not exceed $75,650 in most areas of the country, but up to $153,400 for certain high-cost areas, and annual household income for a 5-8 member household to not exceed $99,850 for most areas, but up to $202,500 in expensive locales.
This USDA loan information is correct as of July 2017.
USDA Mortgage Insurance Requirements
The U.S. Department of Agriculture USDA backs the mortgage program.
Borrowers which use the program also support the program by means of mortgage insurance premiums charged to program homeowners, this way, the government is able to keep the Rural Housing Loan program affordable.
USDA last changed its mortgage insurance rates in October 2016. Those rates stay in effect today.
Current USDA mortgage insurance rates are:
- 1.00% upfront fee paid at closing, based on the loan size
- 0.35% annual fee, based on the remaining principal balance
USDA upfront mortgage insurance is usually added to your loan balance, making the funds required at closing a lot less.
Via its Rural Housing Loan, the USDA offers 100% financing at very low mortgage rates in rural and suburban neighborhoods.
Even better is that underwriters “relax” approvals. Borrowers don’t need to meet every approval requirement to the last letter.
USDA Loans Income Limits
There is one area in which the USDA will not budge, the USDA will not guarantee a mortgage for a household which exceeds its maximum income limits for a given area.
This is because the USDA loans are meant to promote home ownership among households of “modest means” only.
To be eligible for the USDA financing, a household’s annual earnings must not exceed the median household income for the area by more than 15 percent, with an allowance for the size of your household.
For example, the USDA income limit for an 8-member household is higher than the USDA income limit for a 4-member household; just as the income limit for an 8-member household will be higher than the income limit for a 6-member household; and, so on.
USDA income limits have a floor, based on household size:
1-4 member household: $75,650
5-8 member household: $99,850
Note that USDA income limits vary by area, though. Always ask your mortgage broker for income limits in the area that you want to buy your home.
Households with more than 8 members can add eight percent for each additional member to their 1-4 member household USDA income limit.