First Time Home Buyer’s Guide to USDA Loans
First-time home buyers may find the most challenging part of buying a home is coming up with the down payment.
But many home loans today require a very small down payment or none at all. The lowest mortgage rates in over a year are making these loans even more affordable.
A home finance option that is still relatively unknown is the USDA loan. Yet, it requires absolutely no down payment.
USDA loans, also known as rural development loans, were created to help residents of suburban and rural areas achieve homeownership. Low mortgage rates and an annual fee instead of mortgage insurance (PMI) can make USDA a less expensive option than FHA or conventional loans.
Also, USDA loans are available to both first-time and repeat home buyers.
Even though the loan comes with low mortgage rates, no down payment, and low insurance costs, fewer than 5% of mortgages are USDA loans.
In many ways, it’s the best-kept secret in the mortgage world.
How USDA loans work
The United States Department of Agriculture (USDA) loan is intended to help people purchase homes in a rural area. Rural areas are determined by the USDA based on area populations.
This is where some home buyers assume they are not eligible because they live too close to major centers of population. Yet many suburban areas are eligible, even though they lie just miles outside of major cities.
The USDA mortgage is the most widely available zero-down home loan. The only other similar loan program is the VA loan, which is available to home buyers with eligible military experience.
The USDA loan is available to buyers of any background. The property location is the most important part of the eligibility requirements. Beyond that, the buyer must intend to live in the home as their primary residence, and they must have a household income that is below 115% of their area’s median income.
Like an FHA loan, there are required fees associated with a USDA mortgage. USDA loan fees are different than paying for mortgage insurance on an FHA loan.
USDA borrowers will pay an upfront fee of 1.00% of their loan amount. The buyer does not pay this in cash. Rather, it is wrapped into their total loan amount to reduce out-of-pocket closing costs. However, if the borrower wishes to pay the fee in cash upfront, they are permitted to do so.
In addition to the upfront fee, the borrower pays a small fee monthly which helps defray costs of the USDA loan program. This monthly payment is equal to one-twelfth of 0.35% of the existing loan balance
These fees should not scare away new home buyers. The overall cost of USDA loans is generally less than FHA loans or even some conventional loans.
The end result is a zero-down loan with a very affordable mortgage payment. Many new home buyers discover they are paying less for their USDA mortgage than they did for rent.
Getting approved for a USDA loan
Getting approved for a USDA mortgage may be easier than you think.
Because the USDA wants to make it easier for low-income and moderate-income borrowers to become homeowners, the USDA loan requires the home buyer makes less than 115% of their area’s median income.
For example, a family of two is eligible to buy a home in a Seattle, Washington suburb area with an annual income of up to $93,450. If you have a family of five and you’re moving to the same area, you can make up to $123,350 a year.
Annual income limits vary by region. For a five-person family, here is the maximum qualifying annual income in other areas:
- San Antonio, Texas: $98,650
- Chicago, Illinois: $115,100
- San Jose, California: $161,000
- Miami, Florida: $106,700
- Richmond, Virginia: $114,750
Potential borrowers don’t need to have “good” credit history to get a USDA mortgage loan. Lenders require a credit score of just 640 to qualify.
A smart first step is to check with a USDA lender on the USDA-eligible area closest to your current residence.
Most lenders, especially those around eligible areas, offer USDA loans. They process all the paperwork and work directly with the U.S. Department of Agriculture to obtain a loan approval.
If your current lender does not offer USDA loans, find one that does. Don’t opt for FHA simply because your preferred lender can’t do USDA loans.
You might save money upfront and monthly by choosing USDA.
Find out your rates for a USDA mortgage
The USDA loan is just one of many affordable loan programs. Fortunately for those looking to buy a home, mortgage rates are the lowest they’ve been in over a year.
Your mortgage rate depends on multiple factors, including which type of loan you apply for. If you’re looking for a loan, it’s important to check what interest rate you would get today.