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How does the USDA Loan work?

There are two types of USDA Loans. One is the USDA direct, and the other is the USDA guaranteed loan. The USDA direct is exactly what its name says it is. Borrowers work directly with their local USDA office to facilitate the loan. The more common USDA loan is the USDA guaranteed loan. The USDA guaranteed loan is where borrowers obtain a home loan from a private lender or bank, and the loan is backed or guaranteed by the USDA.

The USDA loan is the least common of the main four types of home loans (FHA, VA, Conventional, and USDA), its popularity has grown significantly over the last several years due to the many attractive features that it has.

By definition, the USDA home loan is designed for borrowers of low to moderate-income in more rural areas. The rural areas part of this is somewhat misleading. The majority of the Unites States actually qualifies for this loan. The main areas that do not qualify are major metropolitan areas with larger populations.

The USDA loan is a 100% no money down loan, and this is quite probably the biggest driver of its recent popularity. While it doesn't have traditional mortgage insurance, it goes have its own fees associated with it. Instead of MI or MIP the USDA Home Loan has what's called a guarantee fee. This fee is seen in two forms. There is an up fee guarantee fee and a yearly fee that is paid out monthly. These fees are used to facilitate the program. Most loan types have fees like this; however, the USDA Loan has the lowest of all the government-backed loans, and that's another reason why the loan product is so popular.

The USDA Loan is a 30-year fixed, fully amortized loan. What this means to borrowers is at the end of the loan, it is completed paid off. There is no balloon payment or additional fees. Additionally, adjustable-rate loans are not available. Closing costs and other third-party fees are typical of any other loan type. Standard appraisal and title fees apply. The lender fees will vary from lender to lender, but a competitive environment keeps this in check.

The USDA does not set minimum credit scores for the USDA home loan, which is left up to the individual lender. Most lenders have minimum scores of 620 and higher. Typically, the lender's credit risk department makes this decision.

USDA home loan interest rates: What is the difference between the USDA Loan Interest Rates and other loans such as the FHA loan rates and conventional loan rates?

The USDA home loan traditionally has very good rates compared to other loan products. Unlike the conventional loan, the USDA loan puts less emphasis on the borrower's credit score. While rates will vary some with carrying credit scores, it is not weighed as heavily. It is more comparable to the FHA Loan and interest rates that go along with it.

The USDA loan, FHA loan, and VA home loan are all government loans, so when it comes to interest rates, they are based on government back bonds. Since these loans can be less risky for the lender or servicer due to the government's guarantee on them, they tend to be more aggressively priced when it comes to interest rates.

To get the optimal rate on a USDA loan, a borrower would still need to have above-average credit; however, the lower scores do not see a big gap in rate versus the higher scores seen with conventional loans. Another factor in the borrower's interest rate will be the individual lender. Each lender is allowed to set their own interest, so a borrower may see a slight difference in the rate they are quoted from lender to lender. Most lenders use a couple of variables when setting rates, such as credit score, payment history on debts, and debt to income.

What is the minimum down payment for a USDA loan?

The USDA Home Loan does not require a down payment. Homebuyers can finance up to 100% of the sales price of the home. Borrowers can put money down on a USDA loan if they choose to do so, and by doing this, they will lower their monthly payment.

Can I refinance my USDA mortgage?

Yes, USDA loans can be refinanced. The USDA does require that the loan that someone has to be in place for at least 12 months before a refinance. Another requirement for a USDA refinance is that the current loan must be a USDA home loan. Borrowers cannot refinance from a non-USDA loan to a USDA loan.

Is a USDA cashout refinance available?

The answer to this is no. The USDA rural housing program is for rate-term refinances and purchase transactions only.

Who benefits from the rural development loan?

As mentioned earlier, the USDA rural development loan was designed for home buyers and homeowners with low to moderate incomes in designated rural areas. By offering this program, the USDA helps stabilize communities that may be underserved by other programs. Anyone can participate if they are in a qualifying area and they meet the household income requirements.

What areas are eligible to qualify for a USDA loan?

To qualify for the USDA rural housing loan, a home must be in a qualifying area often referred to as a rural area. With that being said, the definition of a rural area is somewhat loose. Most of the smaller towns in the United States meet this qualification. Only about 3% of the country does not qualify, which leaves 97% of the country that does qualify for the Rural Housing Program.

How can I determine if an area is USDA eligible?

The easiest way is to visit the single-family housing program website for the USDA. Individuals can enter an address, and it will tell them if a home qualifies. They can also look at the map for a broader view of what does and doesn't qualify.

Does the USDA loan have mortgage insurance?

While the USDA loan does not actually have mortgage insurance (MI), it has its own version, which is called a guarantee fee. The USDA guarantee fee comes in two places. There is an upfront of 1%, which is added to the loan. There is also a yearly fee of 0.35% that is paid out monthly in the borrower's payment.

Can the upfront mortgage insurance be financed?

The USDA mortgage does not call it upfront mortgage insurance (MIP) like FHA does; however it is the same basic principle. It is called a guarantee fee, and yes, it can be financed into the loan. The Guarantee Fee is 1% of the total loan amount. A good example would be on a $100,000 loan amount, and the Guarantee Fee would be $1,000, making the entire loan amount $101,000

What is the USDA home loan income limit?

The USDA home loan income limit will vary from location to location. It is based on the median income for a given area. They use a maximum factor of no more than 15% of the median income. A good example is if the median salary for a given area is $70,000 per year, a person could qualify with income up to $80,500. (15% of $70,000= $10,500 + $70,000= $80,500)

Which is better, the USDA loan or the FHA loan?

While both loan types offer a low-down-payment mortgage for a home purchase and both have a form of mortgage insurance, the USDA home loan program is typically seen as a better option for those who qualify. FHA requires 3.5% down while the USDA loan program is 100% no money down. FHA has a min credit score of 580 for the 3.5% down and 500 for 10% down. USDA technically doesn't have a min score; however, most lenders will not go below 620, and it's very common to see some at 640+. Every situation is different, and it will come down to location, credit, and financial situation.

What's the maximum USDA mortgage loan amount?

Many people are often surprised when they learn that the USDA single-family loan program does not have a maximum loan amount. The only constraint in this area is the debt to income ratio. With the USDA home loans, borrowers have to meet thresholds for what's called the front-end ratio and back end ratio. The front-end ratio is the borrower's gross monthly income against the new house payment. The back-end ratio is the borrower's gross monthly income against the new house payment along with all other debts found on their credit report. The most conservative front-end ratio is 28%, and the most conservative back-end ratio is 41%. With higher credit scores USDA will offer what's a called a ratio waiver that will enable the borrower to go up to 31% on the front and 43% on the back.

Is a vacation home eligible for a USDA loan?

Unfortunately, the USDA home loan can only be used for a primary residence. Additionally, borrowers cannot own another home.

Is a non-citizen eligible to use a USDA loan?

Yes, non-citizens can participate in the USDA single-family housing program if they meet the required status set forth by the USDA and all other qualifying factors.

Can I finance a home that has a septic tank with the USDA home loan?

Yes, the USDA home loan allows homes that have septic tanks. The system will be required to be in proper working order with no defects. It is not uncommon for homes in rural areas to have these types of systems.

Can the seller pay some of my closing costs with the USDA loan?

Yes, home sellers are allowed to pay up to 6% of the total sales price towards the buyers closing costs and pre-paid items. Pre-paid items refer to the escrow setup for taxes and insurance.

Can I obtain a USDA home loan if I have had a previous foreclosure?

The USDA home loan does allow homebuyers to participate that have has a previous foreclosure. The requirement is that the buyer be three years removed from the event.

Qualifications for the USDA loan

What are the qualification requirements for the USDA Loan?

Qualifications for the USDA loan may vary from lender to lender is certain areas such as credit score and loan amount. The USDA has some basic guidance that everyone follows which is:

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