USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its USDA Rural Development Guaranteed Housing Loan program. USDA loans are available to home buyers with below-average income and offer 100% financing with reduced mortgage insurance premiums. USDA Home loans are typically for buyers in USDA-approved rural areas. The most common USDA mortgage loan is the Section 502 Guaranteed Loan Program which is offered by USDA-approved lenders.
- Credit Score – Most cases, you will need a credit score of at least 640 to qualify for an USDA loan.
- Down Payment – Zero down payment
- Guarantee Fee – USDA loans do not technically require mortgage insurance, but they do have what’s called a guarantee fee, which works like mortgage insurance in helping to guarantee the loan. When a government agency backs a loan, such as a USDA loan or an FHA loan, they are essentially providing insurance to the lender. If the borrower defaults on a government-backed loan, that agency pays the lender to help them recoup their losses. Fees that come with these loan programs, such as the guarantee fee, help pay for that insurance.
- The USDA guarantee fee – which you may sometimes see referred to as a funding fee – comes in two parts: an upfront fee and an annual fee.
- Upfront Fee – USDA loans currently come with a 1% upfront guarantee fee. This means that you’ll pay 1% of the loan amount. While it is called an “upfront” fee, you do not necessarily have to pay it upfront yourself. USDA loan borrowers can choose to include the cost of their upfront guarantee fee in their loan.
- Annual Fee – USDA loans also come with annual fees, though you will not actually pay it once per year in a lump sum. Instead, you will pay a portion each month as part of your monthly mortgage payment. The annual fee is equal to 0.35% of your loan balance.
- As an example, if you are buying a $275,000 home with no down payment. Your upfront guarantee fee is 1% of this, or $2,750. If you roll this cost into your loan rather than paying it out of pocket, the USDA will allow you to get a loan for $277,750 to cover the cost of the home as well as your guarantee fee. Then comes your annual fee: 0.35% of $277,750 is $972.13. You will pay this over the course of the year, so divided by 12 months, your monthly fee will be equal to $81.01.
- The USDA guarantee fee – which you may sometimes see referred to as a funding fee – comes in two parts: an upfront fee and an annual fee.
Debt to Income Ratio (DTI) – Your debt-to-income ratio (DTI) is a percentage that represents how much of your monthly income goes to pay off debts. You can calculate your DTI by adding up the minimum monthly payments on all your debts (i.e., auto loans, credit cards, installment loans, etc.) and dividing it by your gross monthly income.