The Home-Buyer’s Guide to USDA Loans

Buying a home with no money down may seem impossible but there are several government-sponsored initiatives that allow you to do just that. The U.S. Department of Agriculture, for instance, offers qualified home-buyers 100% financing through the USDA Rural Development Single Family Housing Guaranteed Loan program.

Loans are issued by participating lenders and backed by the USDA. The program is open to first-time buyers as well as buyers who’ve owned a home previously and it covers a range of properties, including existing homes, new construction, townhomes and manufactured homes. Keep reading for a quick breakdown of what you can expect with USDA mortgage financing.

USDA Loan Eligibility

Because the USDA loan program is administered by the federal government there’s a certain amount of red tape you have to cut through to get approved. If you apply, it’s assumed that:

• You meet the income guidelines
• You plan to use the home as a primary residence
• You’re a U.S. citizen, non-citizen national or Qualified Alien
• You’re not in default on any federal loan obligation, including student loans
• The property you’re buying is in a qualifying area
• You have enough assets to cover closing costs
• You have a credit score of at least 640

The USDA loan program is geared towards buyers who are the lower or middle range on the income scale. Your income can’t exceed 115 percent of the median area income for your household size in the area where the home is located. The Department of Agriculture publishes a map that details individual income thresholds for each Census-designated area in all 50 states.

As far as the home itself goes, it has to be located in an eligible rural location. That doesn’t mean, however, that you have to pack up and move to the country. The USDA uses a broad definition of rural so you could still qualify even if you’re planning to set up shop in the suburbs. If you already have a specific property in mind, you can use the USDA’s address locator tool to see if it’s covered.

USDA Loan Costs

While you’re not required to put any money down on a USDA loan, that doesn’t mean it’s free. You’re still responsible for paying closing costs, which can run anywhere from 2 to 5 percent of the purchase price. Sellers are allowed to pay up to 3 percent of the closing costs with a USDA loan.

You also have to account for private mortgage insurance premiums. Borrowers are expected to pay an upfront premium and a monthly premium. As of 2016, the upfront premium is 2.75 percent of the purchase price; the monthly premium is set at 0.50 percent. Fortunately, both premiums are rolled into the loan so you don’t have to pay them out of pocket but this does impact the amount of your mortgage payment.

Before You Apply

A USDA loan can be a suitable mortgage option for low and moderate income buyers but there are a couple of stumbling blocks to watch out for. First up is USDA’s rule regarding assets. The guidelines disqualify you iif you have enough cash to put 20 percent down on a home. If you have sizable reserves in the bank, you may need to shift your focus to an FHA or conventional loan instead.

Second, there are the credit score requirements. You’ll need a minimum credit score of 640 to have a shot at approval. If your score is below that mark, you’d need to work on raising it before approaching a lender. Take our brief two-minute assessment to learn how you can begin improving your credit today if applying for a USDA loan is on your to-do list.