2023 USDA Loan Guide

2023 USDA Loan Guide

On occasion, you may have taken a trip throughout your local grocery store and seen stickers on package meat or produce stating “certified by USDA.” But a little-known fact is that the USDA also certifies (or rather guarantees) home mortgages.  

If you’re thinking you must be a farmer in the middle of nowhere surrounded by cornfields to use a USDA loan, you would be pretty far off base (although it could happen). 

In actuality, the U.S. Department of Agriculture (USDA) engages in a lot more than just the food you eat. It also provides assistance to low-to-moderate income households located in predominantly rural areas. 

Through its Rural Development housing programs, the USDA offers competitive home financing solutions to eligible borrowers. Here are a few things you need to know if you are considering using a USDA mortgage for your next home purchase or refinance.

What is a USDA Mortgage?

The U.S. Department of Agriculture is a complex, multifaceted entity that wears multiple hats. Under this umbrella is Rural Development, an agency part of USDA with the ultimate goal to help improve the economy and quality of life for Americans living in rural communities. 

When you hear of a USDA mortgage, it’s coming from this agency. It's formally known as the USDA Rural Development Guaranteed Housing Loan Program (SFHGLP) (what a mouthful), but industry professionals often use ‘USDA mortgage’ as shorthand to refer to these types of government-backed loans.

USDA mortgages offer a unique set of features that make them a competitive alternative to mainstream conforming conventional mortgage loans. In fact, it's only one of two government programs that will allow borrowers to put no money down on a purchase (100% financing). 

Also, similar to other home financing solutions, USDA programs allow borrowing to purchase, build, repair, and even refinance. The catch is that much like FHA mortgage programs, USDA does require homeowner-paid mortgage insurance to help offset and fund protections it offers to lenders by guaranteeing the loan in the event of borrower default.

USDA Loan Requirements, Restrictions, and Considerations

There are many USDA home mortgage programs, but it's 502 Direct Loan Program is probably the most popular affordable housing option offered by the agency. Nevertheless, it's important to note that a USDA mortgage might not be the right fit for every borrower. 

Using our proprietary self-diagnostic tool, ReviewMyMortgage.com has helped thousands of borrowers just like you identify whether a USDA mortgage is right for them. If you still have questions, you can also always connect with a featured lender to create a customized financing plan around your individual needs.

No matter what stage of the process you're in, if you are considering using a USDA mortgage for your financing needs, here are a few of the basic requirements and restrictions you should know about.

USDA Loan Requirements

Borrowers seeking to obtain a USDA mortgage must meet certain minimum eligibility criteria to qualify for a new mortgage loan. Borrowers must be1:

• U.S. citizen, non-citizen national, or qualified alien
• Have not been barred from participating in federally sponsored programs
• Generally unable to obtain financing from other sources with reasonable terms

But that is not all. In addition to meeting these basic requirements, the following criteria must also be met1:

• Intent to occupy the property as your primary residence
• Hold a credit score of at least 640 or greater (can vary in some cases)
• Meet income eligibility requirements based on state, MSA, and household size
• Have a maximum (front-end) housing ratio of 29% and (back-end) debt-to-income (DTI) ratio of no more than 41% (higher ratios permitted with compensating factors)

USDA Loan Restrictions

USDA mortgages have many restrictions. One of the biggest restrictions is that the subject property must be located in a qualified rural area. The agency uses the definition of rural set by the Census Bureau to mean most depopulated, nonmetropolitan urban places. 

This generally refers to cities and towns with populations less than 35,000 residents.2 Properties must also conform to the following parameters to be eligible for a USDA mortgage loan1:

• Must be approximately 2,000 square feet or less
• Cannot have an in-ground swimming pool
• Primarily residential in nature (limited commercial and farming capacities)
• Not have a market value that exceeds the applicable area loan limits

If you are curious to see if your home is considered to be in a designated rural area, you can use the agency’s free property eligibility search tool which pinpoints your home's locations using GPS technology to tell you if it’s in an eligible area.

Another restriction is that like conforming conventional mortgages, USDA has designated qualifying area loan limits based only on your individual state and county. 

However, eligible borrowers can finance up to 100% of the fair market value of a property in some cases, provided you can demonstrate sufficient repayment ability and you meet all other eligibility criteria.1

USDA Loan Considerations

In order for the USDA to insure mortgage loans under its umbrella, it charges homeowners mortgage insurance premiums that are used to help fund the program, making more loans possible for other borrowers. 

Its mortgage insurance premiums are broken up into two stages: an upfront guarantee fee and an annual fee. Combined, these premiums are quite competitive, often saving borrowers much more than private mortgage insurance or other agency mortgage insurance premiums.

The upfront guarantee fee is usually lumped into your loan amount, so you pay it over time. However, you do have the option to finance a portion of the upfront fee if you prefer. For both purchase and refinance transitions, the upfront fee is 1% of your base loan amount. 

USDA will allow borrowers to exceed normal loan-to-value (LTV) restrictions by allowing eligible borrowers to finance over 100% of the fair market value of the home, provided it's only to finance the upfront guarantee fee. 

The second stage is an annual fee, which is applied to all loans at a rate of 0.35% and is based on the remaining principal balance of the mortgage each subsequent year for the life of the loan.

Pros and Cons to Using a USDA Mortgage

There are a number of benefits to using a USDA mortgage over other mortgage loan options. Nevertheless, this mortgage solution can have some downsides that you should be aware of before buying or refinancing. 

One of the biggest advantages that USDA has over other programs is that it's overall pricing is far superior. Yes, there is the upfront guarantee fee and annual fees to consider, but comparatively USDA mortgages are much more affordable than other government-backed programs. 

Similarly, USA mortgages offer flexibility to eligible borrowers by offering a no down payment option, no prepayment penalty, and allow you to roll the financing costs into your loan amount. This option can also be popular if you need a solution with flexible credit requirements. 

The biggest sticking point with USDA mortgage loans is that there are several hoops to jump through to get your foot in the door. Not only do you have to meet certain income eligibility requirements, your property also must be in a qualifying rural area.

If you're still having trouble deciding if a USDA mortgage is the right mortgage option for you, reach out to us at ReviewMyMortgage.com to compare options, to find a loan officer, and stay in the know with the latest news and programs guidelines in your area.

Description: Who they are best for, pros vs cons, RD explanation, mortgage insurance and USDA funding fee considerations, geographical and purchase price limitations, 100% funding details, etc. How our website can help you determine if USDA is a good option in your area.

Sources

1 United States, Congress, Rural Development. HB-1-3555, USDA Rural Development, 31 Mar. 2021. Accessed 22 Jan. 2022. 

2 USDA. (2022, January 11). Single Family Housing Direct Home Loans. Rural Development. Retrieved January 22, 2022, from