USDA rural home loans

Three gates: place, income, occupancy

USDA lists who may apply. Household income cannot exceed 115 percent of the area's median household income. The applicant must agree to live in the home as a primary residence. And the applicant must be a U.S. citizen, U.S. non-citizen national or qualified alien. The property must be in an eligible rural area, which you check address by address on USDA's eligibility site. Many small towns and outer suburbs qualify.

Income is measured for the household, not only the borrowers, and USDA allows certain adjustments. That is why the income guide in this file shows how to compare your number with the published limit and when to ask a lender to run it properly.

What the loan can cover

USDA says guaranteed funds may buy new or existing homes used as permanent residences, including condos, planned unit developments, modular and manufactured homes. Closing costs and reasonable expenses tied to the purchase may be included in the transaction. Repairs and rehabilitation tied to the purchase, essential household equipment that conveys with the home, and site preparation are also listed as eligible uses. There is no set acreage limit, but the home cannot be income-producing.

Rates, terms and fees

Lenders set the interest rate; USDA encourages comparison shopping. The guaranteed loan is a 30-year fixed rate loan. Instead of private mortgage insurance, USDA charges the lender a nonrefundable upfront guarantee fee and may charge an annual fee, both of which can be passed on to the borrower. Federal regulation caps the upfront fee at 3.5 percent of the loan and the annual fee at 0.5 percent of the average scheduled balance, and USDA announces the current rates within those caps. Ask your lender to show the current figures on the Loan Estimate.

Credit

USDA states that the guaranteed program has no credit score requirement, but applicants must demonstrate willingness and ability to handle debt. In practice, lenders apply their own standards and use USDA's automated underwriting system, so scores still matter for how the file is processed.

Three tests, in order

A USDA guaranteed loan has to pass three separate tests. First, the property must be in an eligible area; check each address on USDA's map before you tour. Second, your household's adjusted income must be at or below the limit for your area, counting everyone who lives in the home. Third, the borrowers must show they can repay, using the program's payment-to-income ratios. Many buyers check only one of these and are surprised later. The guides on the map and on income limits show how to run all three before you make an offer.

USDA or FHA?

Many buyers who qualify for a USDA guaranteed loan also qualify for FHA, so it pays to price both. USDA can mean no down payment, but only for homes in eligible areas and households under the income limit, and its loans are 30-year fixed only. FHA works almost anywhere and has no income limit, but needs at least 3.5 percent down for borrowers with a 580 or higher score and carries a higher upfront and annual insurance charge. The comparison guide in this file walks through both loans on the same house, including the financed upfront fee, the starting monthly annual charge and the cash needed at closing, and includes a calculator you can run with your own price. It also lists the differences that matter beyond cost: USDA counts total household income for eligibility, USDA loans need an agency guarantee step, and FHA loans are capped by county loan limits. If you qualify for both, ask one lender for Loan Estimates on each.

How to use this file

Read the eligibility guide first: it walks through the three gates in order with a small calculator for the income test. Then use the guides on the map, the guarantee fee, property requirements and the direct program. If you are close to an income limit or an area boundary, ask a USDA-approved lender to check before you make offers.