The USDA Loan, also referred to as the RD or Rural Development loan, is a mortgage assistance program insured by the USDA that provides 100% financing and no money down loans. Previously known as the Section 502 loan, the USDA program requires no down payment for qualified buyers on homes in rural areas. It is quickly becoming one of the most popular mortgage loan programs due to its low cost and widespread availability through USDA-approved lenders.
Who is eligible for the USDA Loan?
The USDA loan is available for buyers who earn low- to- modest wages and who have FICO scores of at least 620. The USDA developed the RD loan to give middle-class Americans the option to purchase a home without the burden of a large down payment. The income restrictions are based on the median income in a given region and can vary with household size. USDA is more relaxed on credit standards than most other loan programs. Buyers with a 620 or above may be approved. Some disqualifying factors are inadequate number of active trade lines (there must be at least two), collection accounts being added within the previous 12 months, late federal debt obligations, and outstanding judgements. Approved lenders may consider other trade lines if necessary. A buyer must be able to budget their proposed house payment with their current obligations. The debt-to-income ratio must not exceed 41%.
Which properties are authorized for the USDA Loan?
The USDA loan is eligible only on single family residences in approved rural areas. The buyer has to live in the house as their primary residence. Rural areas are defined by the USDA and include open land, small suburbs, and exurban communities. The vast majority of U.S. land is USDA-eligible, so finding a qualifying home isn’t difficult. The home must pass all home inspections and meet USDA’s safety standards.
Is the USDA Loan more affordable than FHA?
The USDA Loan requires zero money down, whereas the FHA loan requires at least 3.5% of the purchase price as a down payment. USDA mortgages have lower mortgage rates and mortgage insurance than FHA. USDA has what they call a guarantee fee that is broken into an upfront and an annual, or monthly, fee. These fees just decreased in October 2016, so USDA mortgages are even more affordable than before. The upfront fee is 1.00% and can be financed into the loan and paid throughout the term of the mortgage. The monthly fee is only .35% and is also rolled into the loan. These fees are almost a point lower than FHA’s and they can be bundled into the payments instead of being paid upfront. With the lower guarantee fees and mortgage rates, a USDA loan with a $250,000 purchase price costs $100 less than an FHA mortgage of the same price.