Definition of a USDA Mortgage
An USDA loan is a mortgage backed by the federal government’s U.S. Department of Agriculture. This means that if the borrower can’t pay the mortgage and loses the home, the government will cover the lender’s losses.
This loan program promotes homeownership in more rural areas of the country for low- and moderate-income buyers. Surprisingly, 97% of the U.S. is eligible for USDA financing.
Benefits of a USDA Mortgage
USDA mortgages are a little-known option that make buying a home easier for those who don’t have money for a down payment or who can’t get a traditional mortgage for other reasons. This program is available to both first-time and repeat buyers.
No Down Payment
A USDA loan allows you to buy a home with 100% financing. Even FHA loans, which are designed for those who don’t have large down payments, require 3.5% down. If you don’t the money for a down payment, this loan can make it possible for you to buy a home when you otherwise couldn’t.
Lower Interest Rates
Since USDA loans are backed by the U.S. Department of Agriculture, borrowers are offered lower-than-market interest rates. This rate doesn’t vary depending on your credit score or the amount of your down payment like the rate on a conventional loan does.
Flexible Credit Score Guidelines
This loan allows for flexible credit scores, including making it possible for borrowers with flawed or limited credit to get financing. Lenders may choose to accept alternate payment history, such as rent, cell phone, utility payments if the borrower’s credit history is too short.
Low Private Mortgage Insurance (PMI)
If you get a loan with less than 20% down, you have to pay mortgage insurance. But with a USDA loan, your mortgage insurance rate is one low rate—just .35% of the loan’s remaining principal, paid annually.
Finance Upfront PMI
USDA loans also have an upfront premium, which is 1% of the loan’s amount. This fee can be rolled into the loan, which means that you don’t need to bring that money to closing.
Qualifying for a USDA Loan
Meet Income Requirements
You must fall under income limits to be eligible for a USDA loan. Go here for those limits. Your income determines the maximum loan size.
Buy in an Eligible Area
You must purchase a home in an eligible area. Go here to see what addresses are eligible. In general, cities and towns with a population of less than 20,000 qualify. Bigger cities may also be eligible if they have rural characteristics.
Your property will be appraised to ensure that it’s worth the amount you’re paying. The appraiser will also verify that the home is safe and livable and that it meets the USDA’s minimum property requirements. Any issues with safety or livability need to be fixed before closing.
*Lower credit scores allowed depending on the lender and alternate documentation.