1. What is a USDA mortgage?

A U.S. Department of Agriculture and Rural Development (USDA) mortgage — also called a Section 502 loan — provides approved lenders with government guarantees on mortgages made to rural homebuyers.

From 2009-2016, the USDA guaranteed mortgages to 11 million eligible rural homebuyers nationwide.

2. Who is eligible for a USDA mortgage?

While many types of homebuyers are eligible, including current homeowners, whenever a shortage of funds exist, USDA mortgages are limited to:

  • first-time homebuyers; and
  • veterans. [7 CFR §3555.107(a)]

Eligible homebuyers need to:

  • meet regional income requirements;
  • use the home as their primary residence;
  • be a U.S. citizen, U.S. non-citizen national or Qualified Alien;
  • purchase a property that is deemed “modest, decent, safe and sanitary;”
  • not have been suspended or restricted from participating in federal programs;
  • be able to meet credit obligations in a timely manner;
  • have a minimum credit scoreof 680; and
  • purchase a property within an eligible rural area. [7 CFR 3555.151 et seq.]

The homebuyer needs to have the ability to repay the mortgage. To calculate their repayment ability, the monthly amount of principal, interest, taxes and insurance (PITI) may not exceed 29% of their monthly income. The monthly amount of PITI plus other recurring monthly debts (the back-end debt ratio) may not exceed 41% of their monthly income. [7 CFR §3555.151(h)(1)(i)]

Their new monthly housing payment may not be significantly higher than their current housing payment. [7 CFR §3555.151(h)(2)(ii)]

Further, the lender may consider amounts received through mortgage tax credits and Section 8 vouchers when calculating the homebuyer’s ability to pay. [7 CFR §3555.151(h)(5); (6)]

However, homebuyers purchasing an energy-efficient home under the Rural Energy Plus program may have PITI amounts slightly higher than allowed under the regular USDA mortgage program. [7 CFR §3555.151(h)(1)(ii)]

Eligible homebuyers qualify when having an income that is:

  • very low;
  • low; or
  • moderate.

For instance, a rural homebuyer with one to four household members in Bakersfield, California needs to have an income of no more than $75,650 in 2016 to qualify for a USDA mortgage with a moderate income.

Eligible rural addresses and regional income limitations are found at the USDA’s website.

3. What type of property is eligible for a USDA mortgage?

To be eligible, the homebuyer needs to purchase the home as a primary residence and it needs to be in a qualified rural area. The mortgage may also be used for:

  • the construction or purchase of a new home;
  • the purchase of an existing home;
  • the cost of repairs needed when buying an existing home; and
  • the purchase and cost of relocating a home. [7 CFR 3555.101(a)]

The property:

  • needs to be of a modest size, meaning it cannot exceed the typical-sized lot for the area (a somewhat subjective requirement);
  • may not include income-producing land or buildings, or be used as a farm or other commercial purpose;
  • needs to be accessible by a roadway; and
  • needs to have access to adequate utilities. [7 CFR 3555.201(b) et seq.]
4. Can you refinance a USDA mortgage?

In some cases, homeowners may use a USDA mortgage to refinance an existing USDA mortgage. The refinance may be:

  • streamlined;
  • non-streamlined; or
  • streamlined-assist. [7 CFR 3555.101(d)]

No cash-out refinances are allowed with a USDA mortgage.

5. What are the USDA mortgage fund limits?

The maximum mortgage amount may not exceed the lesser of:

  • the property’s fair market value (FMV), as determined by an appraisal, plus the amount of the upfront mortgage guarantee fee;
  • the property’s purchase price and acquisition costs; or
  • 90% of the cost to purchase a newly constructed home. [7 CFR 3555.103]

The mortgage interest rate needs to be:

  • fixed for the life of the mortgage;
  • negotiated to the best available rate;
  • at or below the Fannie Mae rate for 30-year fixed rate mortgages (FRMs); and
  • set for a maximum repayment period of 30 years, paid monthly. [7 CFR 3555.104(a); (b)]

The mortgage may not:

  • include negative amortization;
  • be an adjustable rate mortgage (ARM);
  • have a balloon payment; or
  • include a prepayment penalty. [7 CFR 3555.103(c); (d)]
6. Are there other mortgage costs, like mortgage insurance?

Unlike some other government-insured mortgages, USDA mortgages do not require mortgage insurance.

Instead, the lender needs to pay an upfront guarantee fee. Lenders have the option to pass this fee along to the homebuyer, and the homebuyer may choose to include this cost in financing. The fee amount varies periodically and is available via local USDA offices. The fee may not exceed 3.5% of the home’s purchase price. [7 CFR §3555.103(g)]

The lender also needs to pay an annual fee. This fee amount changes periodically. The fee amount may not exceed 0.5% of the average scheduled unpaid principal mortgage balance over the life of the mortgage. Lenders may pass this cost along to the homebuyer. When the annual fee is paid late, the USDA may collect a late fee from the lender, which the lender may not pass along to the homebuyer. [7 CFR §3555.103(h)]

The late fee may not exceed a “reasonable amount” for the area. [7 CFR §3555.253(a)]

7. Can homeowners use USDA mortgage funds for purposes other than a home purchase?

The homebuyer has some flexibility in allocating their total mortgage proceeds. For example, the homeowner may also use the USDA mortgage to pay for:

  • the purchase and installation of essential household equipment, such as:
    • carpet;
    • appliances; and
    • heating and cooling systems;
  • the purchase and installation of energy-saving measures;
  • site preparation for new construction;
  • special features needed due to a homebuyer’s disability;
  • expenses related to originating the USDA mortgage, including:
    • legal, architectural and engineering fees;
    • title exam and insurance;
    • transfer taxes and transfer fees;
    • appraisal;
    • home inspection;
    • fees to connect utilities;
    • the upfront mortgage guarantee fee; and
    • in some cases, discount points paid to reduce the mortgage interest rate. [7 CFR 3555.101(b)]

However, USDA mortgages may not be used:

  • to purchase an existing manufactured home;
  • to purchase land or buildings principally for income-producing purposes;
  • to establish a “buydown” account;
  • to make payments on a lease; or
  • when seller concessions exceed 6% of the purchase price. [7 CFR 3555.102]

While existing manufactured homes may not be purchased with a USDA mortgage, the homebuyer may use the USDA mortgage to buy a new manufactured home of 400 square feet or larger. This includes the cost to:

  • transport the home;
  • purchase a site;
  • build a permanent foundation; and
  • install the home on the site. [7 CFR 3555.208 et seq.]


8. Can a USDA mortgage be transferred or assumed?

The lender needs to receive USDA approval before allowing a transfer with an assumption of the mortgage. The USDA may approve a transfer with an assumption when:

  • the transferee assumes the entireoutstanding debt and acquires all property secured by the mortgage;
  • the transferor remains personally liable for the mortgage;
  • at the time of the transfer and assumption, the transferor pays any recapture resulting from an interest subsidy granted;
  • the transferee meets the same eligibility requirements applied to the original homebuyer;
  • the property continues to meet eligibility requirements;
  • the existing mortgage lien remains first;
  • any new interest rates or mortgage terms may not exceed the amounts allowed by the USDA at the time of transfer;
  • the new interest rate may not exceed the mortgage’s original interest rate;
  • a new guarantee fee, based on the remaining principal due, is paid; and
  • the transferee meets eligibility and underwriting requirements. [7 CFR 3555.256 et seq.]

When the homebuyer transfers ownership without giving the lender notice, upon discovery the lender needs to:

  • notify the USDA and continue the mortgage without the USDA’s guarantee;
  • obtain USDA approval for the transfer with assumption; or
  • foreclose on the mortgage and submit a claim to the USDA for any loss. [7 CFR 3555.256(c)]

In some cases, the transfer doesn’t trigger the due-on clause. These cases include transfers:

  • to a spouse or children not resulting from the death of the homebuyer;
  • to a relative, joint tenant or tenant resulting from the death of the homebuyer;
  • to a spouse or ex-spouse resulting from a divorce or legal separation;
  • to a person other than the deceased homebuyer’s spouse who assumes the mortgage for the benefit of the deceased homebuyer’s dependents; or
  • into an inter vivos trust in which the homebuyer doesn’t transfer occupancy rights. [7 CFR 3555.256(d)(1)]

When one of these types of transfers occurs, the lender needs to notify the USDA. The guarantee will continue and the transferee may either keep the original rate and terms of the mortgage or apply for a new rate and terms. [7 CFR §3555.256(d)(2)]

9. What happens when a homeowner defaults on a USDA mortgage?

When a homeowner defaults on a USDA mortgage, the lender needs to act promptly to collect overdue payments to bring the delinquency current. [7 CFR §3555.301(a)]

When a homeowner is unable to bring the delinquency current, the lender needs to take loss mitigation action. [7 CFR §3555.301(b)]

The lender needs to contact the defaulting homeowner promptly in order to evaluate their ability to bring the payments current and make a reasonable plan to do this, or reach a foreclosure

alternative. The lender needs to contact the homeowner to arrange an interview about the purpose of the delinquency before the mortgage becomes 60 days past due without a payment arrangement in place. [7 CFR §3555.301(c) et seq.]

To bring the mortgage current, the lender needs to consider:

  • repayment agreementlasting three months or less;
  • special forbearance agreementof payments no larger than the equivalent of 12 months of PITI payments; and
  • loan modification, a permanent change to the mortgage terms. [7 CFR 3555.303(b)]

Before initiating foreclosure and before the mortgage becomes 60 days past due, the lender needs to assess the property’s physical condition to:

  • determine whether the property is occupied; and
  • take steps to maintain the property. [7 CFR §3555.301(f)]

When a mortgage becomes 90 or more days delinquent, the lender needs to get USDA approval of a formal servicing plan to seek a foreclosure alternative or bring the mortgage current. The lender may not need to submit a formal plan when they have lower than average delinquency or foreclosure rates for mortgages in their portfolio. [7 CFR §3555.301(h)]

When a lender decides to foreclose, it needs to initiate foreclosure within 90 calendar days of the decision, unless federal, state or local law requires it to be delayed. [7 CFR §3555.306(b)]

10. What lenders are eligible to originate a USDA mortgage?

To be eligible to originate a USDA mortgage a lender needs to:

  • possess the demonstrated ability to underwrite and service mortgages;
  • comply with USDA mortgage requirements; and
  • apply with and receive approval from the USDA. [7 Code of Federal Regulations §3555.51 et seq.]

Lenders may demonstrate their ability to originate and underwrite mortgages by submitting to the USDA a summary of recent mortgage activity or providing evidence of an experienced underwriter on staff. [7 CFR §§3555.51(a)(9)]

It may demonstrate the ability to service mortgages by submitting evidence of having serviced SFR mortgages within the past year or a written plan to contract for escrow services. [7 CFR §§3555.51(a)(10)]

Once originated, lenders may sell USDA mortgages to:

  • other lenders approved by the USDA;
  • Fannie Mae;
  • Freddie Mac; or
  • the Federal Home Loan Banks. [7 CFR 3555.54]
11. Where can I read more?

Read more about the USDA single family housing guaranteed loan program at the USDA’s website, here.