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USDA Loans

What is a USDA Loan?

A USDA loan is a mortgage offered by an approved private lender, but guaranteed by the USDA. This guarantee protects the lender from loss, allowing them to offer highly favorable terms to borrowers who meet the program’s three main criteria: property location, household income, and standard financial qualifications.

The key features that define a USDA loan are:

  • 100% Financing: No down payment is required.
  • Geographic Restriction: The property must be located in a designated rural or eligible suburban area.
  • Income Limit: The borrower’s household income must not exceed 115% of the median household income for the area.

Qualifying for a USDA loan is uniquely based on three distinct, non-negotiable requirements: the borrower, the property, and the income.

1. Borrower Credit Qualification

The USDA loan program is known for its flexible credit requirements, similar to FHA and VA loans.

  • Credit Score Requirements: The USDA itself does not set a minimum credit score requirement for the program. However, most lenders use a credit score of 640 or higher for streamlined, automated underwriting.
  • Lower Scores: For borrowers with scores below 640, approval is still possible through manual underwriting by the lender, which involves a holistic review of the borrower’s credit history, payment patterns over the last 12-24 months, and compensating factors like low DTI or stable income.
  • Debt-to-Income (DTI) Ratio: Lenders typically look for a DTI ratio no higher than 41% of the borrower’s gross monthly income, though a DTI up to 46% may be accepted with strong compensating factors. A front-end ratio (housing payment only) should not exceed 29%.

2. Property Eligibility (Location is Key)

The property must meet specific geographic and physical requirements.

  • Location: The home must be located in a USDA-eligible area. Despite the name, this includes many suburban areas and small towns with populations generally under 35,000 residents. Buyers must use the official USDA eligibility map to confirm the address.
  • Intended Use: The property must be the borrower’s primary residence and cannot be used as an investment, rental property, or for commercial activities.
  • Property Type: The loan is generally for single-family residences. The home must also meet USDA minimum property standards for safety and habitability, including functioning heating, plumbing, and electrical systems.

3. Income Limits

USDA loans are designed for low- to moderate-income borrowers, making income a strict qualification component.

  • Maximum Income: Household income (including income from all adult members who will reside in the home, even if they are not on the loan) cannot exceed 115% of the area’s median income (AMI).
  • Variable Limits: The exact dollar amount for the income limit varies significantly by county and household size. For most non-high-cost areas in 2024, the limits are typically around $119,850 for a 1-4 member household and $158,250 for a 5-8 member household.

Income Calculation: The USDA allows buyers to deduct qualified childcare expenses for children aged 12 and under, which can help households meet the limit.

Down Payment & Mortgage Insurance: The Costs

How Much Down Payment for a USDA Loan?

  • Zero Down: USDA loans are one of the few major mortgage programs that offer 100% financing, meaning no down payment is required for eligible borrowers.

Do USDA Loans Require PMI?

The USDA program requires mortgage insurance, which it refers to as a Guarantee Fee and an Annual Fee, in place of Private Mortgage Insurance (PMI).

  1. Upfront Guarantee Fee: A one-time fee equal to 1.00% of the loan amount. This fee can be rolled into the final loan amount, meaning it does not have to be paid in cash at closing.
  2. Annual Fee (Monthly): An ongoing charge calculated annually but paid in monthly installments, currently set at 0.35% of the remaining loan balance. This monthly cost is significantly lower than the monthly mortgage insurance required by FHA loans, making it highly cost-effective.

Removal of Insurance: Unlike FHA loans (which often require MIP for the full term), the monthly Annual Fee on a USDA loan can be removed by refinancing into a Conventional mortgage once the loan-to-value (LTV) ratio reaches 80%.

Assumability and Loan Terms

Are USDA Loans Assumable?

Yes, USDA loans are assumable.

  • Like VA and FHA mortgages, USDA loans are generally exempt from the “due-on-sale” clause, allowing a qualified buyer to take over the seller’s remaining loan balance, interest rate, and original terms. The new buyer must be fully qualified by the lender to assume the loan.

Key Loan Terms

USDA loans offer the stability of a 30-year fixed-rate term. Since the loan has no set maximum purchase price or loan amount (unlike conforming loans), the maximum loan size is determined by the borrower’s income and ability to repay.

Your Expert USDA Loan Partner

The USDA loan is an exceptional program that uniquely combines zero-down payment financing with flexible credit standards, all while offering lower monthly mortgage insurance than many competing government programs. Its specific income and location requirements demand a lender with deep expertise in the program’s rules.

At The Herd Lending, we specialize in verifying your property and income eligibility swiftly and guiding you through the process, ensuring you access this powerful benefit.

Ready to find out if your ideal rural or suburban home qualifies for 100% financing? Contact The Herd Lending to explore your USDA loan options today.

Contact The Herd Lending Today!

Are you ready to explore the benefits of a USDA loan? Contact us today and let our team of experts guide you through the USDA loan process. Call us at (904) 406-7753 or fill out our online contact form to get started. Count on us to help you achieve your homeownership goals in rural communities.
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