If you live in or plan to move to a rural area, you may qualify for a loan insured by the U.S. Department of Agriculture (USDA).
According to the government agency’s website, “This program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas.”
These loans are a great incentive to move to an eligible area because they offer up to 100% financing, low interest rates, and fees, and thus, low monthly payments. They work for first-time home buyers and veteran homeowners alike.
USDA Loan Calculator: How a USDA loan works
You don’t get a USDA loan directly from the government agency. Rather, you’ll get the loan through a conventional mortgage lender, and the USDA will insure the loan.
This process makes it possible to get a loan with favorable terms even if you don’t have great credit. Not just anyone qualifies, though. There are only certain geographical areas that qualify as eligible rural areas (you can find out if your location qualifies using this map).
There are other requirements, too. For example, you must have a credit score of at least 640. Also, there may be income limits, and the house must be your primary residence, so you can’t use it for a rental property. You can learn more about the requirements for a USDA loan on the government agency’s website.
Like any loan, you’ll pay USDA loan closing costs, which can be anywhere between 2% and 5% of the purchase price.
USDA Loan Calculator: How to calculate your USDA loan monthly payment
While you can get great terms with a USDA loan, they do come at a cost. The government agency charges two fees to protect itself in case you default on the loan.
The fees are called “guarantee fees,” and you’ll pay an upfront fee of 1% of the loan amount — you pay this when you close on the loan — and an ongoing annual fee of 0.35% of the original loan amount.
So, when you’re calculating how much you’ll pay on a monthly basis to see if you can afford a USDA loan, be sure to include the annual guarantee fee in your calculation.
You’ll also need to consider other costs, like homeowners insurance and property taxes. In most cases, your mortgage lender will include this in your monthly payment and set aside the funds to make the annual payment for you.
USDA Loan Calculator: Let’s get down to the math
Let’s say you’re hoping to purchase a home in a rural area. To find out what your monthly payment is, you’ll need to know the following information:
- Loan amount (this would typically be the loan amount minus any down payment funds and closing costs)
- Loan term
- Interest rate (these rates change by the day, and sometimes multiple times a day)
- Annual guarantee fee
- Homeowners insurance premium (this can vary by state, but on average, expect roughly $35 per $100,000 in home value per month)
- Property tax (this rate can vary depending on your state and county)
To move forward with our calculation, let’s say you’ll have the following figures:
- Loan amount: $200,000 (you didn’t put anything down and paid the closing costs out of pocket)
- Loan term: 30 years
- Interest rate: 4.5%
- Annual guarantee fee: $700, or $58.33 per month
- Homeowners insurance: $70 per month
- Property tax rate: 1% ($2,000 per year or $166.67 per month)
Using an online payment calculator to get the base mortgage payment, you’ll pay $1,013.37 for just the principal and interest.
In the annual guarantee fee in its monthly form, your homeowner’s insurance premium, and your property tax, your total monthly payment will be $1,308.37.
How to find out your monthly payment
These calculations are based on a completely made up scenario, so it’s important that you plug in the numbers from your specific situation to find out what your potential monthly payment will be.
Of course, that can be tough if you don’t yet know your interest rate, homeowners insurance premium, or property tax rate. The good news is that it’s not too hard to get at least a ballpark figure for these.
For your homeowner’s insurance premium, you can either go with the $35 per $100,000 rule of thumb. You can also shop around and compare homeowners insurance quotes to get a more accurate estimate.
For property tax rates, you can check with your county office to see what you’d pay based on their rate and the state’s rate.
And lastly, for mortgage rates, you can compare mortgage rates with several lenders to see which ones offer the best.
Keep in mind that not every lender offers USDA loans, so you’ll need to ask the lender during the pre-approval process. Otherwise, you might end up using a rate that you can’t use.
As you go through this process to determine your USDA loan monthly payment, you’ll have a better idea of what type of house you can afford long before you start the closing process, which can end up being too late. Not only will that help you make a better decision now, but it will also save you from financial problems in the future.