The full name of this program is USDA Rural Housing Guaranteed Loan Program.
We’ll simplify its name here to the USDA Loan. If you prefer, our office calls it the Meat Loan.

This is the first of two articles. Article number one introduces the program’s benefits. Article two covers the qualifying aspect, which is easier than most consumers anticipate. We’ll need a program to compare to USDA, so we’ll use its closest relative, the FHA loan program.

Let’s get to the first USDA loan benefit:

1. No down payment required

That’s right, USDA loans require no down payment and have a standard 30-year fixed term.

2. Nominal mortgage insurance

In 18+ years of lending I’ve encountered zero home buyers who want or like mortgage insurance. Compared to similar down payment options across other programs, USDA loans require lowest-in-class mortgage insurance.
Government loans split their mortgage insurance (MI) between an upfront fee, financed into the loan amount, and the MI that contributes to the payment amount. The MI that contributes to one’s payment is known by different names, but we’ll call it the mortgage insurance factor or MI factor.

  • USDA’s MI factor, also called its Guarantee Fee, is 0.35%. This program requires 0% down.
  • USDA’s upfront fee is 1.00% or 0.01 times the loan amount, financed into the loan.
  • FHA’s MI factor, also called its Mortgage Insurance Premium is 0.55%. This program requires at least 3.5% down.
  • The upfront government fee for FHA is 1.75%, also financed into the loan amount.

    When compared with FHA, the math above illustrates that the USDA loan saves 0.75% off the top of your closing costs. That’s a decent chunk of change for enhancing your appliances or interior decorating budget.

    As of the writing of this article, rates are still volatile, and we’ll just use 7.50% for illustrating this comparison. When in doubt, ask your lender about your current rate scenario.

    We'll omit the unknown taxes and insurance from the payment, as their addition to payment is the same. Let's compare the principal, interest & mortgage insurance (PIMI) payment between FHA (3.5% down) and USDA (0% down).

    • USDA = $2,118 + $88 = $2,206 per month (PIMI payment)
    • FHA = $2,059 + $135 = $2,194 per month (PIMI payment)

    You read that correctly. The combined savings from 0.75% in closing costs and cheaper mortgage insurance brings this 0% ($0) USDA down payment within ≈$12 per month of its competing 3.5% ($9,500) FHA down payment. 

    3. Max loan amount calculation

    Besides requiring zero down and its lower mortgage insurance, there is one more facet that makes the USDA program shine: its max loan amount calculation. Other Agency (Conventional or Government) loan programs base the max loan amount on the lesser of the purchase price versus appraised value.

    USDA loans are unique as they base the max loan amount solely on the property’s appraised value. Supported by an appraised value that accommodates the purchase price + settlement costs (closing costs + prepaid expenses), there is truly no money required at closing. The program’s ability to finance settlement costs is unique to the USDA loan program. Ensure that your lender does not overlay guidelines that supersede any of the program’s benefits.

    4. Qualifying

    USDA’s program generally follows FHA’s guidelines, but the agency’s goal is to support rural housing. In doing so, they have two distinct qualifiers:

    a. Property Eligibility

    Let’s look at an example:
    My hometown of Madison, Wisconsin, is considered ineligible for USDA financing. That ineligibility spans through the Madison-metro area. Beyond metro areas is generally fair game, until you get to other metro areas, such as Milwaukee

    These ineligible areas are based on recent census data and then polished with criteria that USDA keeps to themselves. Keep in mind that USDA definition of “rural” is relative. In the Cheese State “rural” is different than “rural” in New Jersey, as population densities are far different.

    Try zooming to various areas on USDA’s Property Eligibility map to familiarize yourself with its interface. Madison is located at mid-bottom of WI, if you want to check out my example. Prospective FHA home buyers are often surprised by the areas that report as eligible for the USDA program.

    Note: Beware of external sites that claim USDA eligibility mapping. These sites simply scrape USDA’s data, so they lag behind. Stick to the .gov source.

    b. Household Income Caps

    This program’s guidelines distinguishes between two separate tiers of household income caps: 1-4 and 5+ person households. Married with 3 dependents? You’re in the 5+ (higher income cap) tier.

    Even when income calculations exceed the USDA caps, know that there are deductions to help your scenario fit.

    Subtracting documented childcare expenses is the most common deduction for lowering your household income calculation. There is a handy USDA calculator that accounts for common deductions.

    Your USDA lender can help define and calculate deductions so help them earn their paycheck.

    Note: USDA does not maintain a centralized database with approved lenders. If you think this program could be a good fit for your scenario, just ask your current preferred lender about it.

    This information isn’t all-encompassing, so spend some time speaking with a lender who’s fluent in USDA guidelines. When home buyers’ scenarios fit into this program, financing homeownership gets a little easier.

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