A USDA loan, also known as a Rural Housing Loan, is a mortgage that is guaranteed by the United States Department of Agriculture (USDA).
It is primarily used for the purchase of homes in less densely populated areas, but it may also be used in some suburban areas. USDA guidelines define specific areas where the agency will lend money.
The process of obtaining a USDA loan is similar to what you might expect with a Federal Housing Administration (FHA) loan. USDA mortgages allow you to obtain a true zero percent down payment loan, whereas FHA requires a minimum 3.5 percent down payment. The only other traditional zero percent down payment loan that exists right now is the VA loan.
As with the FHA, the USDA requires mortgage insurance. This is to help offset some of the costs the department incurs for loans that are not paid back.
There are two components to this insurance. There is a one-time, upfront fee that is 1.0 percent of the loan amount. This fee can be financed.
The other portion is a monthly mortgage insurance premium charged at a rate of 0.35 percent of the loan balance per year. On a $150,000 loan, this would be roughly $44 per month, but this will decrease over time as the loan balance depletes.
Keep in mind that zero percent down doesn’t necessarily mean $0 out of pocket. Unless they are covered by a seller credit or gift, closing costs still need to be paid at closing.
As far as income, your eligibility is determined by how much you make in relation to the median income of the area in which you are buying. Currently, you must make no more than 115 percent of that median income to qualify for USDA financing.
As with any type of financing, your credit profile is also a factor in qualifying. For a USDA mortgage, if your score is under 640, you may be asked to provide extra documentation.
To determine whether a USDA loan might be a good option for you, contact your mortgage professional.