If you're looking for an affordable and obtainable mortgage,
don't overlook a USDA Rural Development Loan.
A lesser-known sibling to the FHA home loan program, USDA
mortgages come with more restrictions, but also offer certain
advantages that FHA loans lack. For example, they're one of the few
ways you can still get a zero-down payment mortgage outside of the
VA program for military veterans.
Compare favorably to FHA loans
USDA (U.S. Department of Agriculture) Rural Development
Loans allow for 100 percent financing, so no down payment is
required. Interest rates are comparable to conventional mortgages,
although you do have to pay a financing fee equal to 2 percent of
the loan amount up front. This fee and certain other closing costs
can be rolled into the loan.
There's no mortgage insurance required, although you do have to
pay an annual fee equal to 0.3 percent of the loan balance, which
is a bit less than you'd have to pay for PMI on a conventional
mortgage with less than 20 percent down. This and the upfront fee
are paid to USDA to fund the program, which is now designed to be
self-sustaining and without direct government funding.
By comparison, FHA mortgages require a down payment of at least
3.5 percent. The upfront fee on FHA loans is only 1 percent, but
the annual fee is 1.10-1.15 percent on 30-year loans, depending on
the size of your down payment. That can make FHA loans more
expensive than a USDA mortgage, though it depends on the interest
rate you can obtain for one or the other.
Property, income limits apply
USDA Rural Development Loans have stricter limits on property
types and borrower income than FHA mortgages do. As the name
implies, USDA Rural Development mortgages are limited to home
purchases in rural areas. However, the definition of rural is
fairly broad - it includes small towns and the outlying areas of
many small-to-midsized cities, so you don't have to buy a house out
in the sticks to qualify.
USDA loans are also limited to persons of low and moderate
incomes, but those limits vary depending on where you live. The
general rule is that household income cannot exceed 115 percent of
the median income for your area. In practice, you can earn up to
$74,000 in most parts of the U.S. and still qualify, and
considerably more in high-income areas.
The USDA offers an online tool here that lets you determine
property and income eligibility for your state and county. Under
property eligibility, a map shows you what areas are considered
rural for purposes of the home loan program. Income limits are not
listed up front, but entering your own information will tell you
whether you qualify or not, and also show you the specific income
limits for your county.
There are no specific limits on how much you can borrow,
although program guidelines require that homes purchased must be
modest in size, design and cost. Certain features deemed luxuries,
such as an in-ground swimming pool, are not allowed. You also have
to currently be without adequate housing to qualify for a USDA
mortgage, although that is largely a judgment call by local
Extended payments available for lower-income borrowers
If your income is less than 80 percent of the local median, you
may be able to take advantage of the USDA's Rural Housing Direct
Loan program, which is for low- or very-low income borrowers only.
The Direct Loan program offers mortgage terms of up to 38 years on
conventional homes or condos, or 30 years on manufactured homes.
Payment assistance may be available. The Direct Loan program is
available only to those with good credit histories who are unable
to obtain credit elsewhere.
Where to apply
USDA Rural Development Loans are available through
HUD-authorized lenders, often the same ones that offer FHA loans as
well. A list of lenders in your area can be obtained by contacting
your local USDA Rural Development Office.