May 13th, 2020 10:35 AM by Jackie A. Graves, President
A USDA home loan is a no-down-payment mortgage for low- and
moderate-income homebuyers in largely rural areas. This is a national program
created by the United States Department of Agriculture to help fund loans for
first-time homebuyers or people who don’t meet conventional mortgage
The benefits of a USDA mortgage include no down payment and
looser credit requirements for borrowers. Some drawbacks are that the property
must be located in a USDA-approved area and borrowers cannot exceed income
Here we’ll cover the basics of USDA loans, including:
What type of property is
eligible for a USDA loan?
Homes purchased with USDA loans must be located in eligible
rural areas. The USDA defines these areas as “open country or any town,
village, city, or place, including the immediate adjacent densely settled area,
which is not part of or associated with an urban area.”
The population requirements differ depending on the
characteristics of the property. The maximum population limit is 20,000, as
long as it’s rural and not within a metropolitan statistical area (MSA). It
also must be in an area with “a serious lack of mortgage credit for lower and
moderate-income families,” according to the USDA.gov website.
The easiest way to find out if a home is in a USDA-eligible area
is to check the USDA.gov website here.
The USDA program is like any home loan option, there are certain
eligibility requirements you must meet. If you tick the following boxes, then
you might be eligible for a USDA loan:
USDA mortgages come with two fees that are specific to this loan
program: an upfront guarantee fee and an annual fee. Both of these fees are
charged to the lender who then, usually, passes the cost on to the borrower.
The reason for both of these fees is to keep USDA loans
subsidy-neutral, which means that any losses incurred by the program are paid
for by these fees instead of taxpayer dollars. Depending on the needs of the
program, the fees can change annually.
The upfront guarantee fee for fiscal year 2020, which runs from
October 1, 2019 through September 30, 2020, is 1 percent of the loan amount.
This fee can often be rolled into the mortgage, instead of paying it out of
pocket. The annual fee for FY 2020 is .35 percent of the loan amount. Thus, a
$100,000 mortgage would have a $1,000 one-time payment and a $350 per year
ongoing payment for the life of the loan.
The USDA loan program is geared toward low- and moderate-income
homebuyers. For this reason, applicants can’t earn more than the income limits
set by this federal program. These limits vary by metro area and family size.
In more expensive areas, the income ceiling is higher. The income limits also
change with family size, so for families that have more members the income
limit rises proportionately.
In May 2020, the USDA increased baseline income limits in most
counties. The annual income limit for a one- to four-person household is now
$90,300 or $119,200 for five- to eight-member households. In a higher-cost city
like Los Angeles, for example, the limit jumps to $131,100. The USDA sets
limits at or below 115 percent of the median household income in each region.
These are updated annually.
It’s important to check
the maximum income limits for your family size and where you live to get the most
accurate data. You can also access the new USDA mortgage
calculator to estimate your monthly loan payments in your area.
The benefits of a USDA include things like less stringent
credit-score guidelines and the no-down-payment requirement. It can be a great
program for homebuyers on a budget that are flexible about where they live.
The cons fall under this theme: restrictive. There are
restrictions on where you can buy as well as income restrictions.
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