USDA 
Home Loans

When exploring financing options for purchasing or refinancing a home in rural or suburban areas, the USDA offers a variety of programs tailored to meet the needs of low-to-moderate-income borrowers. These programs not only facilitate home purchases but also provide options for refinancing existing loans. Here’s an overview of the key loan programs available:

USDA Guaranteed Loan

The USDA Guaranteed Loan program is designed to assist low-to-moderate-income home buyers in purchasing homes located in eligible rural and suburban areas. With this program, lenders provide loans that are backed by the USDA, allowing borrowers to benefit from favorable terms, including zero down payment and competitive interest rates. This program is particularly suited for families looking to finance a primary residence, as it offers flexible credit requirements and reduced mortgage insurance costs compared to FHA loans. Since the loans are guaranteed by the USDA, lenders face less risk, making it easier for borrowers to qualify.

USDA Direct Loan

USDA Direct Loans are aimed at helping very low- to low-income buyers achieve homeownership. Unlike USDA Guaranteed Loans, which are offered through approved lenders, USDA Direct Loans are provided directly by the USDA. These loans are intended for families who may not qualify for traditional financing and need additional support to afford monthly mortgage payments. The program offers payment assistance to reduce monthly costs, and eligible applicants can even receive interest rates as low as 1%, making these loans an affordable option for those who meet the income and property requirements. This option helps open doors to homeownership for qualified buyers in rural areas who otherwise might not have access to financing. Consumers must go directly to USDA for a USDA Direct Loan.

USDA Rate and Term Refinance

The USDA Rate and Term Refinance program is available for borrowers who currently hold an existing USDA Direct or Guaranteed Loan and wish to refinance for better loan terms. This option allows homeowners to lower their monthly payments, shorten their loan term, or access cash from their home’s equity. The refinancing process may involve a new appraisal and full underwriting, providing borrowers with an opportunity to secure a more favorable interest rate or to make adjustments based on their current financial situation.

USDA Streamline Refinance

The USDA Streamline Refinance program is specifically designed for borrowers with existing USDA Guaranteed Loans who want to refinance to achieve a lower interest rate without the need for extensive documentation. This streamlined process eliminates the requirement for a new appraisal and simplifies the overall application, making it quicker and more accessible for homeowners. To qualify, borrowers must demonstrate a good payment history and meet other basic eligibility criteria, allowing them to take advantage of lower monthly payments and potentially better loan terms with minimal hassle.

USDA loans offer one of the most appealing benefits in home financing: no down payment requirement. Unlike conventional and FHA loans, which typically require at least 3% to 3.5% down, USDA loans allow qualified buyers to finance 100% of the home’s purchase price. This unique feature makes USDA loans an excellent option for eligible borrowers who may have limited savings for a down payment but are otherwise financially prepared for homeownership. Additionally, the flexibility of USDA loans means that buyers can use gift funds or grants to help cover closing costs, making it even more affordable to achieve the dream of homeownership.

USDA requires that all borrowers meet certain eligibility requirements to ensure that they can repay the mortgage and that the right demographic of people get the assistance they need. Some of USDAs requirements are, but not limited to:

Property and Home Size

Property Type and Occupancy

USDA requires that you use the home as your primary residence, not as a second home or investment property. Although USDA is strict on its occupancy rule, it allows a wide variety of property types to be financed, including, but not limited to, new construction or resale, single-family residences, manufactured home, condo, and townhomes.

Credit Score Requirements

Housing Expense and Debt-To-Income Ratios

To qualify for a USDA loan, borrowers must meet certain requirements to show they can comfortably handle monthly payments. USDA guidelines require that your housing costs, including taxes, insurance, and any HOA fees, do not exceed 34% of your monthly income. Additionally, your total monthly debts, including housing, should stay within 41% of your income. This is known as the Debt-to-Income (DTI) Ratio. In some cases, USDA may allow a higher DTI if you have other strong financial factors that support the higher ratio.

When purchasing a home with a USDA loan, borrowers are required to pay two guarantee fees, which can be considered a more affordable equivalent to FHA mortgage insurance. The first is an upfront guarantee fee, and the second is an annual guarantee fee.

The upfront guarantee fee can be paid in a couple of different ways. You can choose to finance it into the loan, pay it in full at closing, or use a combination of both methods. This flexibility allows you to select the option that best fits your financial situation.

The annual guarantee fee is set at 0.35% of the loan amount. This fee is charged annually but is paid on a monthly basis as part of your mortgage payment. Understanding these guarantee fees is crucial for effective budgeting during your home purchase process.

The USDA loan limit defines the maximum amount homebuyers can borrow through a USDA mortgage. These limits differ by county and depend on whether the loan is a USDA Direct Loan or a USDA Guaranteed Loan. While USDA Guaranteed Loans generally don’t have a maximum loan amount, USDA Direct Loans have set limits based on the property location and borrower’s income.

Although USDA Guaranteed Loan limits are not set in stone there are some rules to keep in mind. The maximum limit is based on your income and your ability to repay the loan, the market value which is supported by an appraisal, and that your loan does not exceed 100% of the appraised value. Some high-cost or densely populated counties may not qualify for standard USDA loans.

If the property’s purchase price is higher than your maximum loan amount and appraised value, you can still buy the property if you have enough savings or another funding source to cover the difference. Depending on the funding source additional verification may be required.

To qualify for a USDA home loan, the property you want to buy must be in an eligible rural or suburban area. Generally, USDA-eligible areas have populations under 50,000, so these loans are ideal for home buyers looking in less urbanized areas.

To see if a specific property qualifies, you can use the USDA Property Eligibility Map. Once you click accept just enter the property’s address, and the map will show you whether it falls within an eligible area for USDA financing.