February 9, 2023 by Leave a comment

If you’re searching for a new home, you may be wondering whether a USDA loan is the right option for you. In this article, we’ll cover exactly what a USDA loan is, how to qualify, and more.

What is a USDA Loan?

A U.S. Department of Agriculture (USDA) loan is designed to support rural land development. USDA home loans are ideal for low-to-moderate-income buyers or first-time buyers. 

Despite their rural focus, these loans are not reserved just for farmers – they are also accessible to other home buyers. Thanks to the expansion of the USDA program, borrowers looking to purchase a property or refinance one in rural or even suburban areas could qualify for a USDA home loan – even if they don’t meet the standard for a traditional mortgage loan. 

Chief among the perks associated with a USDA home loan is the no down payment feature, differentiating USDA home loans from other mortgage products. 

In addition, interest rates on USDA home loans tend to be lower compared to other mortgages. The credit requirements are also generally more relaxed. 

Do USDA Loans Have PMI?

A common concern about USDA loans is whether they include Private Mortgage Insurance (PMI). The short answer? No.

Conventional loans that are not backed by the government require PMI. This type of insurance safeguards the lender if the borrower defaults on the loan. A USDA loan does not have the PMI requirement, considering this is a feature associated with homebuyers who are putting down less than 20 percent of the purchase price of the home. 

While USDA loans forego PMI, the other insurance requirements associated with this loan are two-pronged. Borrowers must pay what’s known as an upfront guarantee fee and an annual fee to cover the mortgage insurance premium. 

The upfront guarantee fee, which could also be called the USDA funding fee, amounts to 1 percent of the size of the mortgage loan while the annual fee costs 0.35 percent of the loan. The funding fee is typically due at closing and it could be combined with the mortgage. The yearly fee becomes part of the borrower’s monthly mortgage installments.  

Despite these fees, USDA loans still tend to have lower overall costs vs. conventional mortgage products, according to Neighbors Bank’s Sam Sexauer, cited by USDAloans.com

USDA vs. Conventional Loans

Conventional loan products are still the most popular type of mortgage for American homebuyers, but USDA loans cater to a specific demographic. There are some critical differences between the two different mortgage types. 

The credit standards associated with a USDA loan tend to be lower, as the government is looking to promote homebuying in areas outside of cities. Potential homebuyers whose credit score needs some work could still qualify for a USDA loan, while the lending standards are more stringent for conventional loans

While lenders will focus on an applicant’s FICO score, the U.S. government relies on its own credit method via its Guaranteed Underwriting System, which has more flexibility than other systems. 

USDA loans also tend to have lower interest rates than conventional loans, allowing low-income homebuyers to borrow at a cost that rivals consumers with pristine credit. 

Additionally, USDA loans have fixed rates, regardless of whether it’s a 15-year or 30-year mortgage. 

Conventional loans might offer adjustable-rate mortgages. The overall costs associated with a traditional mortgage can be as much as two or three times higher than USDA home loans, preventing some low-income or first-time potential home buyers from becoming homeowners.

On the flip side, USDA loans face geographical restrictions as they are meant for properties located in rural areas. Conventional loans do not meet these same geographical limits. 

In addition, the homebuyer with a USDA loan must intend to use the property as their primary residence. In contrast, a conventional mortgage could potentially be used to purchase an investment property, for example. 

Deciding between a USDA and a conventional loan product comes down to the property location and the homebuyer’s earnings, credit profile, and debts. 

For potential homebuyers asking themselves how to get a USDA loan, you can explore USDA loan options and all the perks they offer, including a 30-year fixed USDA mortgage. You may be surprised to learn that many suburban areas may also qualify for a USDA loan program. 

How Do USDA Home Loans Work?

A USDA home loan could be used to finance 100 percent of a property located in an eligible area. Borrowers are not required to apply a down payment toward the property and will have a fixed mortgage rate. 

There is no one-size-fits-all USDA loan. Instead, there are several types. Below is a breakdown of how several USDA home loan programs work. 

  • Single-Family Housing Direct Home Loans: These mortgages are designed for low and very-low-income applicants. They have repayment periods of up to 33 years and, in some cases, even longer. 
  • Section 502 Guaranteed Rural Housing Loan: These mortgages are designed for borrowers with low-to-moderate income. Repayment periods tend to extend to 30 years with fixed-rate terms. 
  • Section 504 Home Repair Program: These mortgages are designed for borrowers who intend to use the loan toward making home repairs and upgrades to the property. The borrower’s income must be less than 50% of the median household income in that area. Additionally, loans cannot surpass $20,000 for 20-year term mortgages. 

How to Qualify for a USDA Loan

If you are wondering how to qualify for a USDA loan, something to bear in mind is that the property must be located within the confines of the government’s eligible rural areas. 

The USDA defines a rural area 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.” 

Beyond that, there are personal requirements that the borrower must meet. While there are various nuances involved with these loans based on factors such as the specific loan type and state in which the property is located, below is a list of some of the standard criteria: 

Standard Requirements for USDA Loans

  • The homebuyer must be a U.S. citizen or permanent U.S. resident possessing a Green Card. 
  • The potential borrower’s credit profile must be deemed acceptable, including a credit score of at least 640. In some cases, the credit score requirement could be as low as 581. 
  • The homebuyer must intend to live at the property as their primary residence. 
  • Income requirements must be met. Considering that USDA home loans are designed for potential home buyers with low to moderate income, their income cannot surpass a certain threshold. These limits vary based on the specific region and size of the family. For the USDA’s single-family home loan guarantees, the household income cannot surpass “115% of the median household income of the area in which the eligible house is located.” In general, borrowers can expect that the pricier the neighborhood, the higher the income limit. 
  • The homebuyer must be in good standing with any outstanding government programs.
  • The applicant can provide proof of paying their bills on time for expenses such as rent or auto loans.  

Applying for a USDA Loan

If you are wondering how to apply for a USDA loan, Total Mortgage is here to make the process easier for you. 

Suppose the property and the borrower meet the criteria for a USDA loan, you could start the application process for a 15-year or 30-year USDA loan online at Total Mortgage today, whether you are looking to buy your first home or refinance. 

Explore Loan Programs from Total Mortgage

Now that we have answered questions such as how to apply for a USDA loan, how to get a USDA loan, and do USDA loans have PMI, you might be ready to take the next step. 

Total Mortgage has mortgage experts standing ready to help borrowers across the country. We’ve also got branches located around the United States. 

After answering a few questions, get your free rate quote today.

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