USDA home loans require zero down payment and offer ultra-low rates. This loan program has helped more than 1 million home buyers since its inception in 1949.
Still one of the best-kept secrets in the mortgage market, USDA loans are gaining in popularity. New home buyers who discover it are often surprised that they can buy a home with zero down, and potentially pay less than they pay in rent.
The USDA loan is not a down payment assistance program or exclusive loan that no one can qualify for. In fact, it’s easier to qualify compared to a Fannie Mae or Freddie Mac conventional loan.
USDA loans are very much like any other mortgage. Mortgage lenders across the country offer it alongside FHA, VA, and conventional loans.
USDA Home Loan Advantages
Where USDA loans differ is the down payment amount. They require zero down payment. In fact, home buyers who receive closing cost credits from their lender or seller often buy a home with zero out-of-pocket costs.
The USDA loan is administered by the United States Department of Agriculture. The program’s mission is to develop rural areas in the U.S.
The loan is available in geographical areas the USDA deems “rural.” Their definition of rural is quite liberal, however. Suburban areas just outside of major metros are often eligible.
In fact, homes within a whopping 97% of U.S. land mass are eligible for a USDA loan.
The loan also comes with lower fee structures than the popular FHA loan. While USDA fees are about to rise, USDA is still the better overall value. Here’s how upcoming fee changes will affect USDA loan applicants.
USDA Fee Changes for 2015
The USDA loan requires upfront fee, also known as a guarantee fee. This fee puts money back into the system to keep the USDA home loan program sustainable and available to future users.
The current USDA upfront fee is 2.0% of the loan amount and will increase to 2.75% starting October 1, 2015. This represents a 37% increase.
The monthly fee will remain the same at 0.50% of the loan amount per year, paid in 12 equal installments along with the monthly payment.
The upfront funding fee increase may sound significant, but it should not put very much burden on USDA home buyers. Here’s an example of the impact.
Fee Increase Impact Example
Here’s the cost difference assuming a home price and loan amount: $200,000
- USDA upfront fee (prior to October 1, 2015): $4,166*
- USDA upfront fee (after October 1, 2015): $5,815*
Home buyers can finance the funding fee into the loan amount. It does not have to be paid in cash. The end result will be a higher final loan amount.
In the above example, the home buyer would end up with a loan amount around $1,600 higher and a monthly payment that increases less than $10 per month.
Even with the increases, the USDA loan still beats FHA out-of-pocket costs and monthly payment.
(*The USDA upfront fee dollar amount is slightly higher than the face value percentage. USDA calculates the upfront fee on the base loan amount plus the upfront fee.)
FHA versus USDA After Upfront Fee Increase
Here’s how USDA stacks up against FHA assuming the new USDA fee.
USDA vs FHA
Total Loan Amount
*Includes principal, interest and mortgage insurance.
All told, the USDA and FHA monthly payments are about the same. The big difference is that you don’t have to come up with a down payment for USDA. That’s a big help for first time home buyers who have difficulty saving the 3.5% down payment required for FHA.
When is the Latest I Can Apply before the Fee Increases?
A lot depends on your lender and your loan file. Your lender needs to submit your loan file to USDA by the end of business on September 30, 2015. The local USDA office needs to receive and accept the file prior to the cutoff to be eligible for the former fee.
USDA loans are a bit different than other loan types. There are local USDA offices throughout the U.S. that put a final stamp of approval on each loan file. This part of the process happens after the bank or mortgage company receives and approves the file.
In essense, each USDA loan file needs two approvals: one from the lender and one from USDA.
For more clarification, here’s how the USDA process works.
- You apply with your lender.
- You find a property to buy and submit all your paperwork.
- Your lender reviews and approves your loan file.
- Your lender submits a complete file to a local USDA office.
- The USDA office reviews your file and issues a final approval.
Your loan file needs to get to step four before you are “grandfathered in” under the old fee structure. The previous steps could take 30-45 days, or longer for home buyers with low credit or hard-to-document income
The sooner you apply with your lender, the better chance you will have to qualify for the lower upfront fee.
Apply For USDA Soon
While the new USDA fees won’t break the bank, you will get a lower payment by getting your USDA application in prior to the cutoff.
This loan is one of the only zero-down mortgages left on the market. As time goes on, the program will become more popular, and costs will increase beyond the most recent fee hike. Secure your USDA loan now before more fees are imposed.