USDA RD Home Loan

The USDA home loan, also known as the USDA Rural Development Guaranteed Housing Loan (RD loan), is a zero-downpayment mortgage that advantages middle-class Americans who don’t have the means traditionally required to obtain a mortgage. The USDA home loan has excellent benefits such as below-market mortgage rates, incomparably low mortgage insurance, and lenient approval standards. Unlike comparable mortgage loan programs, however, the USDA home loan enforces income and geographical restrictions. But for qualified applicants, the benefits often outweigh the restrictions.

The USDA home loan was made possible by the Section 502 loan, which refers to the section 502(h) of the Housing Act of 1949. The loan isn’t as well-known as other low-cost programs like FHA and VA because it hasn’t been on the market as long. In fact, the USDA home loan was just developed in the 1990s. Since then, it has slowly gained popularity, especially among first-time homebuyers, and today it’s one of the most sought-after mortgages available.

To be approved for the USDA home loan, a potential buyer must first find an approved lender. Because of the exclusivity that helps make it so affordable, the USDA home loan is only offered via lenders approved by the USDA. Many lenders don’t even advertise that they offer the RD loan, so interested buyers should ask potential lenders if it’s available. Despite its few restrictions, being approved for the USDA loan is actually very easy. There are just a few things lenders consider when qualifying an applicant.

Property

Eligible homes have to be located in USDA-defined rural areas and they must be used as the buyer’s primary residence. USDA’s goal in creating the RD loan was to promote economical growth in less-developed rural areas by giving residents the opportunity to buy a home at no cost out-of-pocket. Today, the aim is still to give middle-class earners a fair shot at affordable homeownership. Not only does this practice promote economical growth in underdeveloped regions of the country by helping create jobs and grow communities, it also strengthens the housing market which, in turn, has a positive effect on the economy as a whole. Homes eligible for the USDA loan may be new constructions, existing homes, or even foreclosures or short sales. There is also no maximum purchase price as long as the buyer can budget the mortgage payments. In some cases, the lender will allow the buyer to escrow any repairs deemed necessary by the home inspector. Despite the geographical restrictions, finding an eligible property isn’t very difficult; the majority of U.S. terrain is USDA approved—97%, in fact. USDA even has a search engine on their website that will determine whether a specific property or neighborhood is in a qualified area.

Income

Other than property restrictions, USDA’s only other arguably “unusual” approval standard is income, but instead of enforcing a minimum income, the USDA home loan has maximum income restrictions in place. As previously mentioned, the aim of providing the RD loan is to give rural, middle-class Americans the opportunity to buy their own homes. To keep true to the original purpose, USDA enforces maximum income limits to ensure those who truly need a break from unaffordable home buying costs are the ones taking advantage of the loan program. Although these income restrictions are in favor of lower-to-moderate earners, many people earning good wages find they still qualify for the USDA home loan. Because the income guidelines are based on the per capita income in a given area and are considered with the number of people in a household, many families who earn enough wages to support their lifestyle are still eligible for the loan. If a buyer’s income exceeds the maximum amount for their area, there are still other low-cost loans available. The FHA loan requires just 3.5% down, and if coming up with the down payment is an obstacle, the buyer may receive the amount as a cash gift from a loved one.

When evaluating income, lenders will use an applicant’s current financial obligations to determine how much they can afford. This is done by adding the proposed house payment—including taxes, insurance, and other fees— to the total amount paid monthly and dividing the sum by the applicant’s monthly income. The given figure is called the debt-to-income ratio and USDA caps it at 41%. For example, if an applicant currently pays $700.00 in monthly costs and the proposed house payment is $800.00, with a monthly income of $4000.00, their debt-to-income ratio is 37%. Most loans enforce a maximum debt-to-income ratio ranging anywhere from 40% to 50%.

Credit

It’s a well-known fact that good credit is important when buying a house. Not only is credit crucial when being approved for a home loan, it is also important when buying other items, acquiring new utilities or services, and even applying for a new job. Credit isn’t just a demonstration of how someone balances their finances, but also indicative of how responsible the person is overall. Lenders evaluate an applicant’s credit by comparing the middle of the three scores reported by the bureaus to the loan’s minimum approval standards. If the applicant only has two scores, the lender will use the lowest of the two. Credit scores range between 300 which is considered “very poor,” to 850 which is “excellent.” The average credit score is in the mid-600s. Many variables affect credit scores—from the length of time since credit has been established to the number of late payments reported by a bureau. Some of the most harmful things for a credit score are maxed out revolving cards and having accounts sent to collections. Being late on payments will also lower credit scores and making just one late mortgage payment can jeopardize an applicant’s ability to qualify for another mortgage.

All lenders enforce different credit standards based on the respective loan program. Some programs require credit scores above 700 and others will approve much lower scores. Typically, a higher credit score will guarantee a lower mortgage rate, although other factors such as assets may also help secure a good rate. Luckily, for potential buyers who have had some past derogatory credit, the USDA home loan may still approve them. The minimum accepted credit score for USDA loans is 620. This is 20 points lower than the minimum eligible score for the low-cost FHA loan. Since the USDA loan is guaranteed by the U.S. Department of Agriculture, lenders are able to loan money to riskier buyers who otherwise wouldn’t be approved. If the buyer defaults on their mortgage, the lender is protected from loss.

USDA lenders are encouraged to look past individual credit blemishes to consider an applicant’s entire scenario. If the credit report reflects 12 months of on-time payments with no collection accounts reported, the applicant may be approved. USDA lenders like to see at least two positive lines of credit being reported, but if the applicant has insufficient credit, other alternate trade lines may be considered in determining eligibility. Additionally, unlike some other mortgage loan programs, the USDA home loan won’t automatically disqualify applicants with past bankruptcies, foreclosures, or short sales. USDA’s credit approval standards are by far among the most lenient on the market.

For qualified buyers, the USDA loan can offer benefits that aren’t available with other mortgage loan programs. Factors that are most important to most buyers are long-term affordability and minimal initial cost. A primary hurdle for potential homebuyers throughout history has been the ability to come up with the large sums of cash required for down payments and other costs. These aren’t issues with the USDA home loan because it can essentially be cost-free. The USDA loan is one of the most affordable mortgages available. This is made possible through several means.

Mortgage Insurance

Like all forms of insurance, mortgage insurance is paid to protect against loss. In the case of mortgage insurance, the lender is protected against loss if the buyer defaults on their mortgage payments. All loans, regardless of the program (excluding VA), require mortgage insurance if the downpayment is less than 20%. Since USDA home loans are 100% financing, requiring no down payments, all loans must have mortgage insurance for the life of the loan. Buyer-paid mortgage insurance is part of what makes USDA loans possible.

USDA’s mortgage insurance is two-fold, consisting of an upfront fee and an annual fee. FHA’s similar mortgage insurance model requires an upfront and annual fee, as well. USDA’s mortgage insurance is actually cheaper than FHA. USDA’s upfront fee is 1.00%; FHA’s is 1.75%. USDA’s annual fee is .35%; FHA’s is .85%. Not only are USDA’s fees lower, there are actually no fees due upfront. Instead, the 1.00% fee is rolled into the total mortgage. FHA requires the upfront mortgage insurance fee at closing. Since the mortgage insurance rates are lower, USDA monthly payments can be hundreds of dollars less than FHA payments of the same loan amount. Most buyers probably don’t consider mortgage insurance a “benefit,” but when it is so affordable and a factor in keeping mortgage payments low, it is definitely a positive aspect of USDA home loans.

USDA Guarantee

Buyers can’t control mortgage rates as they are based on a number of economical and financial factors. Rates change constantly throughout the day, so it’s nearly impossible to determine what they will be by the time the home is ready to close. Since USDA is government-guaranteed, USDA mortgage rates are lower than comparable mortgage loans. Choosing a USDA loan is a safe bet for buyers who are shopping for affordability. The rates are nationally monitored and, because of the guaranty, lenders are able to offer lower rates to riskier buyers. With incomparably low rates and mortgage insurance, USDA loans are easily one of the most inexpensive mortgages available today.

Closing Costs

Closing costs are necessary for all mortgage loans because they are how third-party services like appraisals and home inspections, title work, and credit reports are paid for. The closing cost amount depends on the loan type, lender, buyer, and even the state in which they live. Some lenders will charge higher closing costs than