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What is a USDA Loan?

A USDA loan (Section 502) is a home loan that is guaranteed by the United States Department of Agriculture. It offers very low and competitive interest rates on home loans to borrowers with no down payment requirements. The USDA Home Loan Program was made available to borrowers with excellent financing terms and flexible credit guidelines to give people an incentive to populate rural areas.

Since the USDA Loan offers 100% financing to buyers and closing costs can be paid by seller or rolled into the loan, homebuyers usually do not have to bring any funds to closing! This program is available in the gold standard of home loans, a 30 year fixed rate mortgage with no prepayment penalties. The terms of a USDA Home Loan are so attractive that rural areas are populating rapidly. Go to USDA Home Loan Comparison to see how the USDA Home Loan stands against other home loan products.

There are a few requirements that must be met to be eligible for a USDA Home Loan. Go to USDA Home Loan Requirements to review these in more detail.

For the last 80 years, The United States Department of Agriculture (USDA) has been at the forefront of developing rural America.

On April 30, 1935, President Franklin D. Roosevelt signed Executive Order 7027 which established the Resettlement Administration (what we know today as USDA Rural Development). During the Great Depression, this Administration provided aid to destitute families by helping them relocate. They also restored soil to eroded areas and issued emergency loans to farmers.

Over time, congress continued to expand the role of the Resettlement Administration. On October 13, 1994, congress reorganized the Resettlement Administration under the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act. Under this Act, the USDA Rural Development Department was created to administer the USDA Home Loan Program for rural housing.

The USDA Home Loan Program has roots into the soil of America back to the days of the Great Depression and is 100% committed to helping improve the quality of life in Rural America. Since its inception, this organization has been helping people live better and still is to this day by continuing to offer you the USDA Home Loan

Go to USDA Loan Comparisons to see how this program compares with other government and conventional loan products.

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USDA Loan Comparisons

USDA Home Loan Comparison	USDA-640	USDA-620	FHA-640	FHA-580	FHA-500	VA	CONV.	CONV.	CONV.
Loan Parameters:
Credit Score	640 and up	620-639	640 and up	580 -639	500 – 579	620 and up	680 and up	620-679	600-619
30 Year Loan Term
15 Year Loan Term
Minimum Down Payment Requirement	ZERO	ZERO	3.50%	3.50%	10%	ZERO	3%+	5%+	20%+
Upfront Insurance/Guarantee Fee/Funding Fee	2%	2%	1.75%	1.75%	1.75%	2.150%	NONE	NONE	NONE
Mortgage Insurance Rate*	0.40%	0.40%	1.25%	1.25%	1.15%		1.15%+	1.25%+	NONE
Non-Occupant Co-signer allowed
Minimum Loan Amount	50k	50k	50K	50k	50k	50k	50k	50k	50k
Maximum Debt Ratio	50%	41%	55%	50%	43%	50%	45%	45%	45%
Maximum Seller Concessions	6%	6%	6%	6%	6%	6%	3%	3%	6%
Annual Household Income Cap
Loan Amount Cap
Property Location Limited to Certain Areas
Note: Mortgage insurance rates on conventional loan programs are based upon credit scores whereas with the government loan programs the mortgage insurance is the same for every borrower and does not discriminate against a borrower’s credit score. Actual mortgage insurance rates may vary upon underwriting approval for non-government loan programs. Mortgage insurance is not required on VA Home Loans or Conventional Home Loans with 20% or larger down payments.

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USDA Required Inspections

Typically, we only require a full appraisal and termite inspection on each USDA Home Loan. However, if the property has a water well as its main water source, a well water test will be required.

Description of Inspections:

The Appraisal is a inspection that is done to determine the market value of the home. Typically, this ranges in costs from $450-$500 depending on your area. The appraisal department will select the appraiser.
The Termite Inspection is an inspection that is done to determine if there are any wood destroying insects present. Typically, this ranges in costs from $75-$125 depending on your area. You can select any termite inspector you wish to use and pay the fee directly to them.
The Well Water Test is a chemical and bacteria test done on the well water to ensure water is safe for drinking. This is administered by a local water testing facility and the fee is paid directly to them.

*Additional inspections may be required.

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USDA Income Eligibility

Unlike other loan programs, the USDA home loan imposes a cap on the total cumulative income earned by all members of a household. Income for each member of the household is taken into consideration into the USDA income cap even if the members of the household are not on the loan. The income of other household members that are not on the loan will not be taken into consideration for debt to income ratio qualification purposes; however, it will be counted in the USDA income cap. Income information and documentation will need to be provided on any member of the household that is currently working even if they are not on the USDA home loan.

The USDA income cap is based upon two factors:

The county you are purchasing the home in.
The size of your household.

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USDA Appraisal Guidelines

An appraisal is required on any home loan purchase transaction to show the current market value of the property. With a USDA home loan, the appraisal is ordered through an appraisal management company that locates an appraiser to go out and appraise the property.

USDA appraisals generally range in costs from $450 to$ 550 depending on the area and appraiser availability. This is an expense charged to the buyer’s credit card directly from the appraisal management company. A copy of the appraisal report is delivered to you upon receipt. Appraisal reports are typically good for a period of 90-120 days.

USDA appraisals follow FHA/HUD Guidelines and must be performed by an FHA licensed appraiser. In the body of the appraisal report, the appraisal must state the property meets FHA/HUD Handbooks 4905.1 and 4905.2.

All utilities to the property need to be on when the appraiser goes out to complete the visual inspection. If the utilities are not on, the appraiser is not able to test the electrical and mechanical systems to ensure they are functioning properly and will need to go back out for a final inspection once the utilities are turned on. Most appraisers will charge the homebuyer an additional fee ranging from $100-$150 for the final inspection so it is very important to check with your realtor and/or seller to verify all utilities are on prior to the appraisal inspection.

If the property you select has a pool, the appraiser is not allowed to give any value to the pool that will contribute to the total property value. This can be a potential issue if the value of the home without the pool is less than the sales price. This would require the homebuyer to bring the difference between the property value and the sales price to closing.

USDA will not guarantee a home loan if a property is located in a 100 year flood plain. Ensure to check with your realtor and/or seller if property is in a 100 year flood plain before submitting an offer.

Last but not least, property must be located in an eligible area. You can easily verify if a property is eligible or not by going to USDA Property Eligibility.

Check with your USDA Home Loan Specialist if you need any assistance determining property eligibility.

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USDA Loans FAQ

Get answers to frequently asked questions

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USDA Loan Process

USDA Process for Home Loan Financing

The USDA Home Loan Process is just like the process for any other home loan. The key difference is a final commitment is issued from the central USDA office in Temple, Texas. Your loan will be processed just like any other home loan and when you file is complete, your USDA Loan Specialist will send it to the USDA office in Temple, TX for the final commitment to be issued. The final commitment is usually the last step in the USDA Loan Process. Once the final commitment is received, the USDA underwriter will finalize the loan and schedule your closing.

USDA PROCESS VS PROCESS OF OTHER HOME LOANS

USDA HOME LOAN PROCESS	OTHER HOME LOAN PROCESS
1. Obtain Pre-Approval Letter from your USDA Loan Specialist.	1. Obtain Pre-Approval Letter from Loan Specialist.
2. Obtain Sales Contract on the home you picked out (be sure it is in a USDA eligible area and property meets USDA requirements).	2. Obtain Sales Contract on the home you picked out (be sure it meets guidelines for loan program selected).
3. Sign Loan Application Documents and send back to Loan Representative with income and supporting documentation.	3. Sign Loan Application Documents and send back to Loan Representative with income and supporting documentation.
4. Appraisal and Inspections	4. Appraisal and Inspections
5. Underwriter reviews all documents and appraisal and advises if they need anything else to finalize the loan.	5. Underwriter reviews all documents and appraisal and advises if they need anything else to finalize the loan.
6. Send underwriter any other items they requested and underwriter checks off on the items.	6. Send underwriter any other items they requested and underwriter checks off on the items.
7. Underwriter sends file to central USDA office for final commitment.	7. Underwriter issues Clear to Close.
8. Underwriter receives file back from central USDA office and issues Clear to Close	8. Schedule Closing.
9. Schedule Closing. NO DOWN PAYMENT!	9. Go to bank to get a cashier’s check for down payment to be paid at closing.
10. Just bring a pen and your state issued photo ID card to the title company and sign your final papers and get the keys to your home!	10. Bring down payment funds, pen, and state issued ID Card to the title company and sign your final papers and get the keys to your home!