USDA guaranteed loans help fund rural development across the country.
In addition to the following brief overview, we also publish a more in-depth guide to USDA loans which highlights their range of loan and grant programs. The following briefly covers the section 502 loan guarantee program.
The USDA Rural Housing Program (Section 502) guarantee program was created to help boost rural development by extending credit to people with moderate income.
Moderate income is defined as the greater of 115% of the U.S median family income or 115% of the state-wide and state non-metro median family incomes or 115/80ths of the area low-income limit. These limits are based upon both the local market conditions and the family size. The moderate income guarantee loan limit is the same in any given area for households of 1 to 4 people & is set to another level for homes of 5 to 8 people. The following table lists examples of limits from a few select areas of the country.
|Location||1 to 4 Person Limit||5 to 8 Person Limit|
|Fort Smith, AR-OK MSA||$78,200||$103,200|
|Northwest Arctic Borough, AK||$157,850||$208,350|
|Oakland-Fremont, CA HUD Metro||$145,700||$192,300|
|San Francisco, CA HUD Metro||$202,250||$266,950|
The floor values on the above limits are $78,200 and $103,200 respectively. Homes with more than 8 people in them can add 8% for each additional member. You can view income limits in your local area here.
Loans can be used for regular, manufactured or modular homes which are no more than 2,000 square feet in size.
The effective loan limit starts at $125,500 in low-cost areas and goes as high as $508,920 in expensive parts of California.
You can view loan amount limits in your local area here.
On regular conforming mortgages private banks offer funding & typically desire borrowers to put down 20% of the home's value to minimize the risk of loss to the lender in the event a foreclosure takes place. If the borrower puts less than 20% down they are required to pay property mortgage insurance (PMI) until the loan balance to home value (LTV) falls below 80%.
USDA loans do not require a downpayment, but they do have two important fees associated with them. One is an upfront funding fee and another is an annual fee which acts similarly to PMI. The upfront fee can be rolled into the loan.
Periodicially the fees associated with a USDA loan change to reflect the costs of running the program. The last major change was announced on September 1, 2016 when the upfront guarantee fee dropped from 2.75% to 1% and the annual fee was lowered from 0.5% to 0.35%. Both the upfront funding fee and the annual insurance premium are far cheaper on USDA loans than the equivalent FHA fees.
The following table highlights the cost of these fees on a $250,000 home.
|Fee Type||Upfront Fee||Annual Fee|
|Upfront Amount||$2,500 rolled into loan||$0|
|Equivalent Monthly Amount||$0||$72.92|