How do USDA Rural Loans Work?

USDA Loan Rural House Front Entrance ViewIf you have never heard of a USDA Rural Loan, you are not alone. This is a very specific product with great benefits that not very many people know about. In this article we will tell you exactly how USDA Rural Loans work and how you qualify for a USDA Rural Loan.

USDA Rural Loans are offered in particular counties, in only a small part of the U.S. To verify whether or not a property is eligible for a USDA Rural Loan, you can go to this website and find out. Outside of the property’s location, you don’t have to worry about being a first time homebuyer in order to enjoy the benefits of this no money down loan.

The main benefit of a USDA loan is that it is a 100% no money down loan, and frequently comes with a lower interest rate than other home loan types. Typically banks do not offer this type of mortgage so you’ll have to find a local lender who specializes in USDA loans. Finding a specialist is important because of the extensive requirements for eligibility and the paperwork for rural property, homes and land.

Unlike CHFA loans, USDA Rural Loans do not require the purchaser to attend any sort of homebuyer counseling. However, similarly to FHA loan programs USDA Loans do require mortgage insurance.

Here is a list of FAQs about USDA Rural Housing Mortgage Program:

The USDA loan guidelines are straight-forward. You must qualify for the program and your home must, too. Here are some common USDA mortgage questions.

How do I check if my home is USDA / Rural Housing-eligible?

With the USDA Rural Housing Program, your home must be located in a rural area. However, the USDA’s definition of “rural” is quite liberal. Many small towns meet the “rural” requirements of the agency, as do suburbs and exurbs of most major U.S. cities.

What is the USDA program’s minimum downpayment?

The USDA has no downpayment requirement. You can finance 100% with a USDA loan.

What’s the maximum USDA mortgage loan size?

There is no maximum loan size for the USDA loan program. The amount you can borrow is limited by your household’s debt-to-income. The USDA typically limits debt-to-income ratios to 41%, except when the borrower has a credit score over 660, stable employment, or can show a demonstrated ability to save.

Is the USDA loan program limited to first-time buyers?

No, the USDA Rural Housing Program can be used by first-time buyers and repeat buyers.

Can I finance the Upfront Mortgage Insurance into my mortgage?

Yes, the USDA will let you finance your Upfront Mortgage Insurance payment into your loan size. For example, if you bought a home for $100,000 and borrowed the full $100,000 from your lender, your Upfront Mortgage Insurance would be $2,000. You could then raise your loan size to $102,000.

My lender doesn’t offer USDA mortgages. What do I do?

The U.S. Department of Agriculture website maintains a list of lenders in the Rural Housing Program. Visit its website to search for a lender, or just skip to the rate quote.

What mortgage products are available with a USDA mortgage?

Currently, the Rural Housing loan is available as a 30-year fixed rate mortgage only. Beginning in September 2014, though, a 15-year fixed rate mortgage will be available. There are no adjustable-rate mortgages.

How much are the closing costs for a USDA mortgage?

Closing costs vary by lender and location. For example, some lenders have high origination charges. Others do not. The same is true for state and local governments. Some states have high costs, others have low costs.

I can’t afford closing costs. Can I get a gift for my closing costs?

Yes, USDA loans allow gifts from family members and non-family members. You will need a gift letter to accompany your loan application. Your loan officer can give you one. If you don’t have a loan officer, get today’s rates here.

I negotiated to have the seller pay my closing costs. Is that allowed?

Yes, the USDA Rural Housing Program allows sellers to pay closing costs for buyers. These costs can include state and local government fees, lender costs, title charges, and any number of home and pest inspections.

Can I use the USDA loan program for a vacation home?

No, the USDA Rural Housing Program is for primary residences only.

Can I use the USDA loan program for an investment property?

No, the USDA Rural Housing Program is for primary residences only.

Is there a minimum credit score for the USDA loan program?

There is no minimum score, per se, but 640 is generally regarded as a cutoff point. If your FICO is below 640, you should be prepared to explain why your credit score is below 640, and provide documentation. If you are without a credit score, your lender may accept “alternate” tradelines to establish credit history.

I recently went back to work. How long until I am USDA-eligible?

If you are a W-2 employee, you are eligible for USDA financing immediately; you don’t need a job history. If you have less than 2 years in a job, however, you may not be able to use your bonus income for qualification purposes.

I am self-employed. Can I use the USDA loan program?

Yes, self-employed persons can use the USDA Rural Housing Program. If you are self-employed and want to use USDA financing, as with FHA and conventional financing, you will be asked to provide 2 years of federal tax returns to verify your self-employment income.

Can I do a “cash out” refinance with the USDA program?

No, the USDA Rural Housing Program is for purchases and rate-and-term refinances only.

Can I use the USDA loan program for my working farm?

No, the Rural Housing Program is for residential property.

Are USDA mortgage rates good?

Yes, USDA Rural Housing Program mortgage rates are often lower than comparable conventional 30-year fixed mortgage rates. And because mortgage insurance rates are lower, with your small downpayment, U.S. Department of Agriculture loans can often be a better deal as compared to FHA loans or conventional loans.

When mortgage rates fall, can I refinance my USDA mortgage?

Yes, USDA loans are eligible for refinance. The USDA Streamline Refinance Program waives income and credit verification so closings can happen quickly. Home appraisals aren’t required, either. 

Apply for a USDA Rural Loan today! 

FAQs originally appeared here.