USDA Mortgage Loan Basics
The U.S.D.A. (United States Department of Agriculture) loan is commonly called the Section 502 loan. It was developed to increase home ownership for low to moderate income borrowers in more rural areas of the country. The U.S.D.A. partners with local lenders in Mass. to extend 100% financing to home buyers. The USDA loan is a fantastic, yet underutilized home mortgage product that is widely available in MA.
USDA Mortgage Facts
- Eligibility is capped based on income
- Property must also be in an eligible area
- Zero Down Payment Required
- Low competitive interest rates
- 30 year fixed loan terms
- Towns in All Mass Counties have eligible properties (except Suffolk)
- Flexible credit underwriting – non-traditional credit may be accepted
- Not limited to 1st time home buyers
- No maximum purchase price
- Seller concessions are allowed
- Must be primary residence
- Condos or Townhomes must meet standards of Fannie/Freddie/VA or FHA
Mass. Mortgage Buddy Tip: The U.S.D.A. loan is a fantastic Zero Down mortgage loan for home buyers in MA. It requires the same amount of paperwork as other traditional mortgages.
Step 1: Income Eligibility
The USDA is committed to increasing home ownership for low to moderate income MA residents that don’t have a lot of disposable income to save for a down payment, but who have demonstrated a history of responsible borrowing. To insure that USDA funding is being used for low to moderate home buyers, the USDA has income caps in place to restrict high income borrowers. In other words the borrower can’t make too much money. These are the Massachusetts USDA income limits
Standard Debt-to-Income Ratio for USDA loans is 29/41% with exceptions being made only with strong compensating factors
Step 2: Property Eligibility
Not only must the borrower income meet the USDA approved criteria, but the property must be eligible as well. Since USDA is traditionally for more rural communities, the property must fall within the approved geographical areas to be considered for USDA financing. Check to see what Mass. towns are in potentially eligible areas with our Mass USDA Map.
You should also search for a specific property address once you have located a house as some towns are only partially eligible. Mass USDA Property Eligibility.
Important: USDA lending is for single family owner occupied properties only. The property can be existing or new construction. Multi-family properties are not eligible. Condos are acceptable if the meet Fannie or Freddie guidelines, or, are FHA or VA approved. Modular are allowed. Mobile homes are not. The property can’t have an in-ground swimming pool.
Step 3: Credit Guidelines
- No stated minimum credit score needed for a USDA mortgage, but most lenders will look for at least a 640 credit score
- 3 years out of bankruptcy, short sale or foreclosure with no late payments of any type on any credit accounts
USDA Mortgage Insurance Rates:
USDA loans have a relatively new mortgage insurance requirement. Mortgage insurance with USDA is different than a conventional or FHA product, because the mortgage insurance (some people call P.M.I.) remains as part of the monthly payment for the duration of the loan. It doesn’t “fall off” when you reach a certain equity position. For many this is a small price to pay for the ability to own a home with a zero down payment.
- For purchases, 2.00% upfront fee paid at closing, based on the loan size. The upfront fee can be rolled into the loan
- For refinances, 1.00% upfront fee paid at closing, based on the loan size.
- For all loans, 0.33% annual fee based on the remaining principal balance.
So, for example, a $100,000 loan size in Hardwick, MA, would require a $2,000 mortgage insurance payment at closing, and $27 of mortgage insurance paid monthly. The $2,000 up-front MIP is rolled in, so the total loan amount is $102,000.
- Accuracy matters – make sure to provide your lender with a complete financial picture & all of information requested
- Inform your lender of any changes to your credit including credit inquiries, new accounts opened, or recent late payments
- Always provide full bank or retirement statements that include your name/address/institution/full account#/all pages. If it says page 1 of 5, all 5 pages will be required.
- Provide documentation after an approval is issued as quickly as possible
- Even with a Zero Down mortgage loan, the buyer will still need funds for the home inspection, appraisal and closing costs
- Once your loan has been cleared by the lender, the USDA must also sign off on the loan. This will add 2-4 days to your closing timeline
- Do not deposit any money into your bank account (other than payroll checks) until first talking with your loan officer; Don’t ever deposit cash into your account during the mortgage process
- Do not open up any new lines of credit or pull your credit until you have closed on your loan
- Do not change your financial picture during the transaction – job change, payment history, etc.
- Work with your lender, not against them. Sometimes it may seem like the lender is asking for too much paperwork, or irrelevant paperwork. The lender is just following strict guidelines. They are not picking on you. Try to be thorough, organized and review all of your documentation before sending it over to make sure it is complete.
Remember:Your lender is your best friend during this process. Be patient and work with them. The road to home ownership requires team work between buyer, lender, attorney & real estate agent.