The U.S. Department of Agriculture (USDA) offers guaranteed home loans for low- or moderate-income individuals and families looking to purchase homes in rural areas of the United States. These USDA mortgage loans offer more favorable terms than many conventional mortgages, allowing more people the opportunity to purchase their own homes.
Who Can Apply for USDA Mortgages?
There are several different types of USDA mortgages available, with the most popular being the Single Family Housing Guaranteed Loan Program. To apply for the USDA Single Family Housing Guaranteed Loan Program, individuals must meet a few requirements. The main eligibility requirements are:
- Meet income-eligibility (cannot exceed 115% of median household income).
- Agree to personally occupy the dwelling as their primary residence.
- Be a U.S. Citizen, U.S. non-citizen national, or Qualified Alien.
To apply for a USDA loan, applicants must be purchasing a home in an eligible rural area. The USDA loan program is aimed specifically at the development of rural areas. Borrowers cannot buy a home outside of the eligible rural areas determined by the USDA.
Use the official USDA tool to check the eligibility of any property.
Additional requirements are in place for screening applicants, including reasonable credit history and the inability to obtain reasonable funding elsewhere. USDA home loan applicants purchasing their first home are also prioritized. Other criteria may apply depending on the number of applicants versus the available funding.
Characteristics of a USDA Mortgage
USDA mortgages are given to individuals or families to purchase, build, repair, or relocate a home in a rural area. Although there are some restrictions on the home type, these tend to be highly flexible to accommodate many different living situations.
Borrowers utilizing USDA loans do not face pre-set loan limits. Rather, the loans will not exceed the appraised value of the home.
Plus, interest rates for USDA mortgages are some of the lowest available, offering below-market interest rates because their government guarantee protects lenders against loss. Mortgage programs like the FHA and conventional loans can have rates on average around 0.5%-0.75% higher than USDA rates.
USDA home loans can also be issued with no money down to borrowers who qualify.
Furthermore, as for mortgage insurance, borrowers taking out a USDA home loan do not purchase PMI; they pay guarantee fees that act as mortgage insurance.
All USDA loans are amortized as 30-year fixed-rate loans. There are no variable-rate or adjustable-rate USDA mortgage options, nor are there short-term fixed-rate loan options.
USDA Home Loans vs. Other Loan Types
USDA loans are distinct from other mortgage types, including FHA loans, conventional mortgages, and VA loans. There are significant differences in down payment requirements, credit requirements, interest rates, and loan terms.
USDA Loans vs. FHA Loans
Both FHA loans and USDA mortgages are not considered conventional mortgages. USDA and FHA loans tend to offer more options to low-income borrowers, depending on where they purchase a home.
Federal Housing Administration (FHA) loans have a down payment as low as 3.5%. These loans do not offer a zero down payment option. Although some USDA mortgage borrowers may be required to pay a down payment, many are offered a 100% loan with the option to make a down payment.
FHA mortgage insurance also tends to be higher than the associated guarantee fees with USDA loans. Moreover, the USDA tends to offer loans to borrowers with lower credit scores.
USDA Mortgages vs. Conventional Mortgages
Conventional mortgages are offered through most mortgage lenders. Unlike USDA mortgages, there are often higher credit requirements and down payments for conventional mortgages. The required down payment for a conventional mortgage may be as high as 20% of the home’s purchase price.
There are no location requirements for homes bought with a conventional mortgage, nor are there any income caps for the borrower. Borrowers taking out a conventional mortgage are also not required to live in the home as their primary residence.
Despite the flexibility of a conventional mortgage, buyers who qualify for USDA loans may not necessarily qualify for a conventional mortgage and vice versa. These two loan types generally do not intersect.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We have worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.