The USDA Rural Development Loan (RD Loan) or Rural Housing Loan is one of the most underutilized loan types available to homebuyers today. Guaranteed by the US Department of Agriculture, the program’s purpose is to provide affordable housing to low and moderate income Americans in the rural parts of the country. That said, “rural” is pretty broadly defined, and there are likely qualifying areas in or very near to the market you are buying in.
Advantages / Pros
- 0% Down Payment
- Competitive interest rates with other loan types
- Low “mortgage insurance” guarantee fee that falls off when your equity is 20%
The USDA loan is one of the best loan products on the market. With the VA loan, it is one of the only widespread loan types offering a 0% down payment.
Who Should Use the USDA Loan?
If you are a first-time homebuyer, compare the USDA loan to the other loan choices and see if your property qualifies – even if you aren’t looking for “rural” homes. Many subdivisions and traditional housing qualify.
Disadvantages / Cons
- Strict debt-to-income ratios
- Limited to qualified “rural” areas
- Upfront and annual guarantee fees
- Best used with good to high credit (620+)
USDA loans do require mortgage insurance in the form of an annual guarantee fee for loans with less than a 20% down payment, but so do the other loan types in some form or another. USDA loan guarantee fees tend to be far less than comparable PMI or MIP for conventional or FHA loan types, respectively.
Who Should NOT Use the USDA Loan
- You are dead set on living within the boundaries of ineligible areas
- You are comparing it to the VA loan and absolutely cannot come up with the guarnatee fee or negotiate the seller to pay it, and must have $0 due at closing
The home must be in an eligible area. Below is a snapshot as of 3/16/18 of the USDA ineligible areas (everywhere not in the peach-orange is eligible).
Notable communities in the Fort Hood area that are eligible per the current map include:
- Morgans Pointe Resort
- Little River Academy
- Owner occupants only
- Successfully qualify for a mortgage
- Cannot own another property in the vicinity (50 miles) (unless your family size has changed)
There are income restrictions. As of this writing, the income limit for the “Killeen-Temple, TX MSA” was $78,200/yr, or $103,200/yr for a family of 5+.
As you would any other loan, your local lenders can work with USDA loans and get you set up!
Frequently Asked Questions – FAQ
- VA Loan or USDA Loan?
- Who provides the USDA Loan?
- Do all lenders provide the USDA Loan?
- How many times can I use a USDA Loan?
- Is it just for farms and ranches?
- Is it for first-time homebuyers only?
- Can I use the USDA Loan for a Vacation Home?
- Can I use the USDA Loan for an Investment Property?
- Can I purchase duplexes or fourplexes with a USDA loan?
- Can I buy new construction homes?
- Can I buy land with a USDA Loan?
- Can I buy mobile homes or manufactured homes with the USDA Loan?
- Can I buy foreclosures with the USDA Loan?
- How much can I spend?
- Are there closing costs?
- What credit score do I need?
VA Loan or USDA Loan?
I strongly recommend at least comparing the USDA loan to a VA loan if the property you are interested in qualifies. It has more fees than the VA loan, including mortgage insurance and a guarantee fee, but even then the math might make sense with the right interest rate.
By using a USDA loan, you can save your VA loan entitlement for later, which has more generous debt-to-income restrictions and no geographic restrictions like the USDA loan.
Who provides the USDA Loan?
The United States Department of Agriculture does not provide the loan, but instead providers lenders a 90% loan guarantee on USDA loans, which allows the lenders to make 100% loans to qualifying consumers with competitive interest rates.
You still need to work with and qualify with a traditional lender to use the USDA program.
Do all lenders provide the USDA Loan?
Not necessarily, but many should.
It is worthwhile to ask your lender if they have worked with it before. Some lenders may be less experienced with the loan type and therefore reluctant to recommend it.
How many times can I use a USDA Loan?
In theory, multiple times. In practice, probably only once. You cannot buy a home with a USDA loan near where you already own a home, and the strict debt-to-income restrictions combined with the income limitations means you’re likely only going to be able to own a couple at most before you are ineligible for either reason.
Is it just for farms and ranches?
Not at all. In fact, almost the opposite. USDA Loans are designed for single-family residences, not for working farms, ranches, or other types of commercial properties.
Only the area must qualify. There are numerous subdivision neighborhoods in the Fort Hood area market that qualify as of this writing, like those in Nolanville.
Is it for first-time homebuyers only?
A common misperception is that the USDA loan is for first-time homebuyer’s only. That is not the case. Repeat buyers can purchase a home with the USDA loan if your job requires their moving at least 50 miles away from an “adequate” property that you currently own or your growing family size requires a larger home .
That said, because of the strict debt-to-income ratios, it is likely easier for first-time buyers or buyers who do not currently own another home with a mortgage. Having other mortgages generally puts pressure on the debt-to-income ratio and can make it more difficult to qualify.