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A USDA home loan is a unique form of mortgage the government offers to low-to-moderate-income home buyers in qualified towns and rural areas.

What Is a USDA Home Loan?

USDA home loans are mortgages offered or guaranteed by the U.S. Department of Agriculture housing loan programs that allow first-time home buyers in rural areas or those who cannot get a conventional loan to purchase a house.

Also known as RD or rural development loans, USDA home loans have zero down payment requirements and lenient credit scores. Additionally, they allow home buyers with a low income to qualify for a modest interest rate, making homeownership more accessible.

Pros and Cons of USDA Loans

Benefits

There is no formal loan limit.
No down payment requirements.
Loans are available for home purchasing and improvements.
Loans are available with low fixed interest rates.
The seller can cover the closing costs.

Drawbacks

The property location.
Borrower’s income.
Loan size.
Home use (as a primary residence only).

The loan also comes with certain upfront and annual fees.

Key Features and Eligibility

USDA loans are government-backed loans offered to qualified low- or moderate-income borrowers living in designated rural areas. The key features of the USDA loans include:

No down payment.
Eligible borrowers have low-to-moderate income not exceeding 115% of the area’s median income. Borrowers must have one year of traditional or two years of seasonal income or self-employment. They must not qualify for conventional financing.
Not specified, but typically needs the credit score to be 640 or higher.
Borrowers can pay 41% of their income towards debts while meeting their financial obligations and still qualify.
In a designated rural area with a population of 35,000 or less.
The home is a primary, non-income-producing residence.
Modest (2,000 sq. ft. or less).

The eligibility requirements for a USDA loan include:

The home must be a primary residence in a rural area with a population of 35,000 or less.
The loan is available to people with low or moderate incomes, with income limits depending on the loan program and your residence location.
The borrower must be a U.S. citizen or permanent resident with a proven record of stable income.
The borrower must have a minimum credit score of 640, although a lower score may also qualify. The borrower must have a demonstrated history of paying back debt.

Types of USDA Loans

Direct Loans

USDA direct loans help low- and very low-income individuals who lack safe housing or cannot qualify for a conventional loan. As of December 1, 2024, the interest rate for single-family housing direct loans is 4.375%.

These loans cover homes with market values below the area loan limit, which varies by location. Depending on the county or state, loan limits range from $398,600 to $919,800. For example, limits may be around $330,000 in rural areas or exceed $700,000 in high-cost markets like Hawaii or California. Borrowers with very low incomes qualify for loan terms of up to 38 years.

Loan Guarantees

The USDA guarantees loans from participating local lenders, allowing home buyers to enjoy a lower interest rate with zero down payment requirements. Instead of paying a traditional PMI, borrowers pay a lower interest rate of 1% and an annual fee of 0.35% of the loan balance.

Home Improvement Loans and Grants

The USDA provides loans up to $40,000 and grants up to $10,000 to help homeowners upgrade or repair their homes. Homeowners can combine loans and grants for a total assistance amount of $50,000.

The loans have a 20-year term with a 1% interest rate. If homeowners sell their property within three years of receiving a grant, they must repay it.

Takeaway

USDA offers direct and guaranteed loans to low- and moderate-income borrowers living in designated rural areas to purchase modest housing at affordable rates. By providing additional support for home improvement projects, the program aims to make homeownership more accessible, ensuring borrowers can upgrade and maintain their homes with minimal financial strain.

What Is a USDA Home Loan?

View Resource What Is a USDA Home Loan?

Jumbo loans, or jumbo mortgages, are designed for financing properties that exceed the loan limits set by the Federal Housing Finance Agency (FHFA) for conventional mortgages. These loans are commonly used by borrowers in high-cost real estate markets where home prices surpass the maximum limits of traditional loans. Jumbo loans are a popular option for high-net-worth individuals and buyers who require larger loan amounts but do not have the liquidity to purchase a high-priced property outright. However, due to their size and lack of government backing, they come with stricter credit requirements and often require a more substantial down payment.

Jumbo Loan Essentials

Jumbo loans are home mortgages that exceed the limits of a conventional mortgage, as set by the Federal Housing Finance Agency (FHFA). Fannie Mae or Freddie Mac cannot guarantee, purchase or scrutinize them.

Unlike conventional mortgages, jumbo mortgages or loans are typically riskier as they lack the guarantee offered by Fannie Mae and Freddie Mac. However, that means that the lenders of jumbo loans are not protected from losses if the borrower defaults.

Because of this, borrowers of jumbo loans need to meet stricter credit requirements, such as a stellar credit score with a very low debt-to-income ratio.

While jumbo loans are considered non-conforming because they exceed the loan limits set by the Federal Housing Finance Agency (FHFA) and are not eligible for purchase by Fannie Mae or Freddie Mac, many lenders structure their jumbo loans to meet the guidelines of a ‘qualified mortgage’ (QM) under Regulation Z of the Federal Truth in Lending Act. However, not all jumbo loans meet QM standards. Qualified mortgages provide certain legal protections to lenders, making them more attractive, but jumbo loans can also be offered as non-qualified mortgages (non-QM), which may come with more flexible underwriting criteria but often carry higher interest rates.

What Is a Jumbo Loan?

A jumbo loan is when the loan exceeds the maximum limit for conventional loans as determined by the Federal Housing Finance Agency (FHFA).

In 2024, the conforming loan limit for single-family homes in most areas of the U.S. will be $766,550, with limits increasing to $1,149,825 in higher-cost areas.

Qualification Requirements

Jumbo loans are specialized and riskier lending options that require stricter underwriting criteria than conventional loans. Because they don’t conform to FHFA standards and involve more money, lenders often set their qualification requirements.

Here are some key requirements:

Down payments for jumbo loans typically start at 10%, but they may range from 5% to 30% depending on the lender and the borrower’s financial profile.
Lenders may require a credit score of 700 or 760 to get approved for jumbo loans. Like any home loan, a higher credit score can be beneficial.
Lenders require a lower debt-to-income ratio to ensure the borrower has sufficient income or assets to cover the loan. While most lenders require a DTI of 43%, they may allow flexibility if the borrower has plenty of cash and solid financials.
Lenders may require borrowers to demonstrate sufficient income and a healthy cash reserve. Most borrowers will need provable liquid assets and enough cash reserves to cover six months to one year of mortgage payments.
Borrowers must provide more extensive financial documentation than is required for a conventional loan, including bank statements, tax returns, W-2s, and 1099s. Since jumbo loans typically require manual underwriting, a human underwriter often reviews these documents.
Lenders typically require at least one appraisal to determine the property’s value, ensuring it justifies the loan amount. For higher-risk or more expensive properties, some lenders may require two appraisals to verify the property’s worth and mitigate their risk.

Advantages and Drawbacks

Advantages:

Jumbo loans allow borrowers to take out a mortgage that exceeds the FHFA limits.
Jumbo loans often come with higher interest rates than conforming loans, though competition among lenders can sometimes result in favorable rates for well-qualified borrowers.
Jumbo loans provide the opportunity to afford more expensive properties.
Various types of jumbo loans are available, depending on loan terms and whether they are fixed or variable. Veterans or active service members may qualify for a VA jumbo loan.

Drawbacks:

Jumbo loans generally require a down payment of at least 10%.
Jumbo loans can involve higher fees and closing costs due to the extra qualifying steps and larger loan amounts.
Jumbo loans can be riskier without the regulatory protections of conventional loans.

Takeaway

Jumbo loans are a type of mortgage financing that exceeds the government-set limits for conventional loans. They often come with more rigorous credit requirements, a high credit score and a low debt-to-income ratio. These loans are popular among high-income individuals who may choose not to pay for a high-priced home in cash, preferring instead to finance the property and preserve their liquidity for other investments.

What Is a Jumbo Loan?

View Resource What Is a Jumbo Loan?

VA loans are issued by private lenders but guaranteed by the U.S. Department of Veterans Affairs (VA). They are available to active-duty service members, eligible veterans, and certain surviving spouses and can be used for various purposes, such as purchasing homes, refinancing, or covering renovation costs.

Overview

Private lenders issue VA loans, and the U.S. Department of Veterans Affairs (VA) guarantees or partially covers them.

Types of VA loans

There are various types of VA loans:

Allows qualified service members to purchase homes without a downpayment.
Funds home construction, including purchasing land, labor, and building materials.
Finances home renovations.
Replaces a current VA loan with a new one at a lower interest rate or converts an adjustable-rate loan into a fixed-rate loan.
Refinances to a new loan with different terms and interest rates.
Allows borrowers to refinance into a larger loan, converting home equity into cash.
Finances energy efficiency improvements for the home.
Helps Native Americans build, purchase, or finance homes on federal trust land.

Key Features and Requirements

VA loans have unique features, eligibility requirements and loan limits.

VA Loan Features

VA loans offer these key benefits:

Reusable loan benefits.
Only applicable for residential properties.
Private lenders issue the loans, but the VA guarantees them.
Available even with a history of bankruptcy or foreclosure.
No mortgage insurance or prepayment penalties.
A mandatory funding fee.
No borrowing limits for borrowers with full entitlement.

VA Loan Eligibility

To qualify for a VA loan, you must meet these criteria:

You are on active military duty or an honorably discharged veteran who served at least 90 days during wartime or 181 days during peacetime.
You served at least six years in the National Guard or Selective Reserve or 90 days on active duty under Title 32 orders (with at least 30 consecutive days).
You are the surviving spouse of a service member who died in action or from a service-related disability, and you haven’t remarried. Spouses can remarry after age 57 or after Dec. 16, 2023. Spouses of missing service members or prisoners of war are also eligible.
You meet the lender’s income and credit requirements.
You purchase a property that meets safety and building standards and is your primary residence. You must occupy the home within 60 days, though this can extend up to 12 months with permission.

VA Loan Limits

There’s no set VA loan size limit if you have full entitlement, but lenders may impose limits based on income and debt. Your loan entitlement is also subject to mortgage limits.

For 2024, the standard VA loan limit in a typical U.S. county is $766,550 for a single-family home, but it can go up to $1,149,825 in high-cost areas. If the home price exceeds the county limit, you can still get a VA loan with a downpayment.

Refinancing a VA Loan

You can refinance a VA loan using these options:

To secure a lower rate or switch from an adjustable rate to a fixed rate.
For borrowers with conventional loans to convert to a VA loan, taking a larger loan, paying off the original mortgage, and receiving the difference as cash.

How to Apply for a VA Loan

Here are the steps to apply for a VA mortgage:

Obtain a Certificate of Eligibility (COE).
Compare lenders based on qualification requirements and mortgage rates.
Organize financial documents like bank statements, tax returns and brokerage statements.
Request preapproval and search for a home that meets the VA’s safety and structural standards.
Complete the mortgage application after accepting an offer.
Provide additional financial or credit information during underwriting if required.

Pros and Cons of VA Loans

Pros:

Purchase a home with no downpayment.
No need for mortgage insurance.
Lender fees are capped at 1% of the loan amount, lowering closing costs.

Cons:

Only for purchasing a primary residence.
Includes a funding fee, which depends on whether you’re buying or refinancing. Funding fees vary based on the borrower’s military status, loan type, down payment (if any) and whether it’s a first-time use or subsequent use of the VA loan benefit.

Takeaway

Service members can use VA loans, guaranteed by the Department of Veterans Affairs, to buy or refinance their primary residences. These loans provide benefits like no down payment, no mortgage insurance and competitive interest rates.

Understanding VA Loans

View Resource Understanding VA Loans

In the past several years, mortgage rates have risen from record lows to the highest in decades. High rates and high housing prices are a tough combination for potential homebuyers. However, even when rates are high, there are ways you can become eligible for lower rates.

Understanding Mortgage Rates

When you take out a loan, mortgages come with interest rates, meaning you’ll pay more than the home’s cash value. When securing a mortgage, you aim to find the lowest rates possible. The lower the rate, the less you’ll pay every month and, therefore, in total.

For example, imagine you’re buying a house for $500,000. You’re putting $100,000 down; your mortgage is a $400,000 30-year fixed loan. For simplicity, these figures focus only on principal and interest and do not include other costs like property taxes, homeowners’ insurance or mortgage insurance.

Consider the following rates based on this example:

Rate	Monthly Payment (P&I)	Total Interest	Total Cost
5%	$2,147	$372,920	$772,920
8%	$2,935	$656,600	$1,056,600

In this example, paying an extra 3% would result in paying $283,680 more than if your mortgage rate were 5%.

Strategies to Lower Your Mortgage Rate

Some factors are beyond your control regarding mortgage rates, such as the Federal Reserve raising rates due to current economic conditions. However, there are some strategies you can implement to ensure you’re getting the best mortgage rate available.

A higher credit score can qualify you for lower mortgage rates. To improve your score, make sure to pay bills on time, keep credit card balances low, avoid applying for new credit in the months before applying for a mortgage and check your credit report for errors.
Liquidity in checking, savings and investment accounts is another positive indicator for lenders, potentially decreasing your mortgage rates. Start saving as much as possible in various accounts. Maintain a solid emergency fund and healthy balances in both savings and investment accounts.
Lenders will examine your debt-to-income (DTI) ratio, determining how much of your monthly income goes toward minimum debt payments. A high ratio will lead to a higher mortgage rate or result in lenders declining a loan altogether. For most conventional loans, lenders prefer a DTI ratio below 43%, though some may accept higher ratios under certain conditions.
The higher your income and flexibility in your budget, the more likely lenders will consider you a low-risk borrower. Never stretch your budget too thin by taking on a mortgage you can barely afford, as financial situations can change.
While most buyers choose fixed-rate mortgages, some opt for adjustable-rate mortgages, where interest rates fluctuate after an initial fixed period. Since these rates are variable, lenders often offer lower initial fixed-rate periods. This option could save you money compared to a fixed-rate mortgage, though it could also cost you more if rates rise.
Don’t settle for the first lender you come across. Just as it’s smart to look at more than one home, you should shop around for lenders. Aim to get rate quotes from two to four companies, giving you various options. If you do this, ensure you submit preapproval applications within the same month so your credit score isn’t negatively impacted.
Purchasing mortgage points is a strategic way to reduce your mortgage costs if you plan to pay it off over a long period. Mortgage points allow you to pay up-front costs to lower your interest rate, potentially saving you money in the long term if you hold the loan long enough.

Timing and Market Considerations

Once you’ve chosen a lender, lock in your mortgage rate to protect yourself from potential increases before closing. Rate locks typically last 30 to 60 days, though some lenders offer extensions for a fee.

If you aren’t in a rush to purchase a home, consider waiting for home prices and rates to decrease. Timing your purchase in line with market conditions could save you money in the long run.

Takeaway

Mortgage rates significantly impact how much you’ll pay for your home. Even a small difference in your mortgage rate can lead to substantial savings. Take the time to ensure you’re getting the best rate available and always ensure the mortgage you choose is one you can comfortably repay.