The USDA Guaranteed Home Loan Program is a home-financing options some should consider. People who should look into this program have incomes that aren’t especially high. In addition, they want to buy homes in rural areas. Or, at least, they’re willing to think about it. If you’re one of these people, you can find out more about this program in this article.
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If you live in or plan to move to a rural area or the outskirts of a suburb, you may qualify for a home loan insured by the United States Department of Agriculture (USDA) under the Single Family Housing (SFH) Guaranteed Loan Program. This is also called the Section 502 Guaranteed Loan Program. Let’s find out more about that program, starting with the obvious first question.
What is the USDA Guaranteed Home Loan Program?
According to the government agency’s website, the USDA home loan 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.”
USDA mortgage loans are a mainstream zero-money-down program. And they are the only such program available to borrowers who have not served in the military.
These loans have extremely favorable terms. They offer up to 100% financing, low interest rates and fees, and thus, low monthly payments. This makes them a great incentive to move to an eligible area. They work for first-time home buyers and veteran home buyers alike.
How USDA loans work
You don’t get a USDA loan directly from the government agency. Rather, you’ll get the loan through a conventional mortgage lender. The USDA will then insure the loan against losses if you fail to repay it.
The benefit of government backing means that you, the homeowner, will pay lower interest rates and no down payment. You will, however, have to pay USDA loan closing costs, which can be anywhere between 2% and 5% of the purchase price.
You say you don’t have a great credit score and can’t make a down payment? With a USDA home loan, you can still get a loan with favorable terms. Not just anyone qualifies, though. The home you’re buying needs to be in the right location. There are only certain geographical areas that qualify as eligible rural areas. (You can find out if your location qualifies using this map).
What are the other loan requirements?
In addition to choosing a qualifying location, there are other requirements, too. Some of the requirements are:
- The house must be your primary residence, not a rental property.
- You must have U.S. citizenship or legal permanent resident status as a U.S. noncitizen national or qualified alien.
- You must have a credit score of at least 640. (Some exceptions apply. Check with your lender for more information.)
- Adjusted household income must be equal to or less than 115% of the area median income.
There is no set maximum home price. You can learn more about the requirements for USDA loans on the government agency’s website. Lenders may set other requirements in addition to those set by the USDA’s Rural Development program.
USDA home loan guarantee fees
While you can get great terms with USDA loans, they do come at a cost. The USDA charges two fees that act as a mortgage insurance premium. They protect the USDA in case you default on the loan. However, these are called “guarantee fees” in documentation, not mortgage insurance. These fees replace the private mortgage insurance (PMI) required for some conventional loans.
Conventional loans are loans not backed by government. Such loans must sometimes have PMI. Specifically, they must have PMI when borrowers have less than 20% equity in their homes.
USDA loans replace PMI with two guarantee fees. The first is the upfront USDA guarantee fee. This fee is a one-time premium of 1% of the loan amount, which you pay when you close on the loan. The second is an ongoing annual funding fee of 0.35% of the original loan amount. (This is the 2021 percentage.)
This is something to keep in mind when using the USDA loan calculator. You can use that tool to calculate how much you’ll pay on a monthly basis to see if you can afford a USDA mortgage. When you do this, be sure to include the annual USDA guarantee fee in your calculation.
In addition to the guarantee fees, you’ll also need to consider other costs. Examples include home insurance and property taxes. In most cases, your mortgage lender will include these in your monthly payment. Your lender will then set aside the extra funds you pay each month to pay the other costs for you, usually once a year.
USDA Loan Calculator
How to calculate your monthly USDA loan payment
Let’s say you’re hoping to purchase a home in a rural area. To find out what your monthly USDA mortgage payments are, you’ll need to know the following information for the USDA mortgage calculator:
- Purchase price/loan amount (this would typically be the loan amount minus any down payment funds and closing costs)
- USDA loan term
- Interest rate
- Annual guarantee fee amount
- Homeowners insurance premium (this varies by state, but on average, expect about $35 per $100,000 in home value per month)
- Property taxes (this varies by state and county)
To move forward with the USDA loan calculator, let’s say you’ll have the following figures:
- Loan amount: $200,000 (you made no down payment 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 mortgage calculator gives you a base loan payment of $1,013.37. This covers just the principal and interest.
There are a few things you need to add in to know your actual payment. These include the annual guarantee fee in its monthly form, your homeowner’s insurance premium, and your property tax. Once you add these, you see that your total monthly mortgage payment will be $1,308.37.
When you add in the annual guarantee fee in its monthly form, your homeowner’s insurance premium, and your property tax, your total monthly mortgage payment will be $1,308.37.
Tips on calculating your USDA loan monthly payment
These calculations are based on a made-up home-buying scenario. It’s important that you plug in the numbers from your specific situation. This will tell you your potential monthly USDA loan payments.
Of course, plugging in your own number can be tough if you don’t known them. How can you calculate your interest payments if you don’t yet know your interest rate? And what value are you supposed to enter for the homeowners insurance premium? For the 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 use the $35 per $100,000 rule of thumb. Or you can shop around and compare homeowners insurance quotes. This will give you an even more accurate estimate.
For property tax rates, check with your county office to see what you’d pay based on their rate and the state’s rate.
Keep in mind that not every lender offers USDA home loans. You’ll need to ask the lender about this during the pre-approval process.
- The USDA Guaranteed Home Loan Program is the only mainstream zero-money-down loan program available to non-veterans
- These are not government loans. They are private mortgage loans guaranteed (insured) by the government.
- Only certain geographical areas qualify as eligible rural areas.
- The financed home must be your primary residence.
- You must be a U.S. citizen or legal permanent resident.
- You need a credit score of at least 640. (Some exceptions apply.)
- Your adjusted household income must be equal to or less than 115% of the median income in the area you’re moving to.
- There’s no maximum home price.
- Some lenders may impose additional requirements.
- Using the USDA loan calculator can give you a good idea how much your monthly payment will be if you purchase a home through this program.
Frequently Asked Questions
How much money do I need for a USDA loan?
These USDA home loans are a zero-down-payment program. So you won’t need any money for a down payment. You will need a qualifying credit score of at least 640 (with possible exceptions). You’ll also need sufficient income to cover the monthly payment. This will vary with the cost of your home. You will also need to pay closing costs, but you may be able to avoid paying these out of pocket.
What is the average closing cost on a USDA loan?
Closing costs vary from one loan to the next. As noted in the above article, these may range from 2% to 5% of the total loan amount. An advantage of USDA loans is that they allow you to roll these costs into your loan. The limit for this is the appraised value of the home. So you may not need to pay any closing costs out of pocket.
What is the maximum debt-to-income ratio for a USDA loan?
The debit-to-income ratio (DTI) is the percent of your monthly gross income you pay toward debts. The highest DPI you can have and still get a USDA home loan is from 34% to 46%. But if you’re in this range, you won’t necessarily qualify. Qualification will depend on other factors.
The DTI range for most qualifying applicants for USDA loans is lower. If only 29% to 41% of your gross income will go toward servicing your debt, you have a better chance of qualifying. This is the standard DTI allowed for these loans.
How is USDA income calculated?
The USDA actually does three different income calculations for this loan program. These calculations are for Annual Income, Adjusted Annual Income, and Repayment Income. For details on how each of these is calculated, take a look a the USDA’s presentation on the subject.
You need to have a good idea what your monthly mortgage payment will be before you close on a home. Finding out during the closing process means finding out too late. This is true of any home purchase and any type of loan. USDA SFH Guaranteed Loan Program mortgages are no exception.
With the USDA loan calculator’s help, you can avoid this. With this tool, you can find out your likely USDA loan monthly mortgage payment in advance. The number will be an approximation, of course. But that’s really all you need to avoid a catastrophic home-buying mistake.
Bottom line: Using the USDA loan calculator will help you make a better buying decision now. It will also save you from financial problems in the future.
- Adjusted Annual Income — USDA Rural Development
- Debt-to-income ratio — Wikipedia
- Fixed vs. Variable Interest Rates: What’s the Difference? — ValuePenguin
- Single Family Housing Guaranteed Loan Program — USDA Rural Development
- USDA Income and Property Eligibility: Rural Business Services, Property Eligibility — USDA Rural Development
- USDA Income and Property Eligibility: Welcome — USDA Rural Development
- USDA Loan Calculator — What’s My Payment?
- USDA Loan Guidelines — Bank of England Mortgage
- USDA Single Family Housing Guaranteed Loan Program — Federal Deposit Insurance Corporation (FDIC)
Ben Luthi is a personal finance writer and a credit cards expert who loves helping consumers and business owners make better financial decisions. His work has been featured in Time, MarketWatch, Yahoo! Finance, U.S. News & World Report, CNBC, Success Magazine, USA Today, The Huffington Post and many more.