Highlights of the USDA mortgage program:
- No down payment required
- No minimum borrower contribution
- Gift funds allowed to pay for borrower’s closing costs and prepaids
- No first time homebuyer restrictions
- Seller concessions allowed
- Liberal qualifying ratios
- Loan limits may be greater than FHA programs
- Available for single family primary residences
The home to be financed must be a USDA eligible property. You can check if the property is located in a USDA eligibale area here.
What is a USDA Mortgage?
A USDA mortgage (also known as a USDA Guaranteed Rural Housing Loan or Rural Housing Loan) is intended to increase the aid for low to moderate income homebuyers. The goal of this program is to provide affordable and safe housing and enhance the quality of life in rural communities. Although rural areas are thought to be in remote locations, the USDA considers many semi-urban areas to be eligible as well.
How a USDA Mortgage Works:
A USDA loan can be used for the purchase or refinance of an existing USDA mortgage. This program is only available for single family primary residences. Borrowers cannot receive cash back on a USDA refinance transaction.
USDA mortgages provide borrowers with the opportunity to obtain 100 percent mortgage financing. Additionally, if the property appraises higher than the contract sales price, expenses such as prepaids and closing costs may be rolled into the loan. Because little to no down payment is required, the borrower will pay a guarantee fee which is similar to FHA’s mortgage insurance.
USDA mortgages require the borrower pay both the upfront and monthly guarantee fee. This fee provides protection to the lender in the event of default. The upfront portion is slightly higher compared to the FHA program; however the monthly fee is considerably less. Similar to FHA loans, the upfront guarantee fee may be financed into the loan above the appraised value.
Much like the FHA program, a USDA mortgage allows for a more forgiving credit history. A bankruptcy discharged as little as three years may not hinder a borrower from qualifying for a USDA mortgage.
You will benefit from the USDA mortgage program if you:
- Have less up-front cash to close than is required for Conventional or FHA loans
- Require less restrictive gift guidelines compared to Conventional loans
- Need the ability to roll closing cost and prepaid expenses into the loan (as stated above)
- Are looking at properties that are located within USDA eligible areas