The USDA Loan We Originate

A USDA Guaranteed loan carries two USDA fees, and understanding them is central to understanding the program's cost. The first is the upfront guarantee fee of 1.00% of the loan amount. Most buyers finance this fee into the loan rather than paying it in cash at closing, so it does not stand in the way of a no-down-payment purchase. On a $250,000 loan, for example, the 1.00% upfront fee is about $2,500, which is typically rolled into the balance.

The second is the annual fee of 0.35% of the remaining principal balance. Despite the name, it is collected in twelve pieces across your monthly payments, similar to how private mortgage insurance or FHA mortgage insurance is billed. Because the annual fee is calculated on the declining balance, the dollar amount drifts down a little each year as you pay the loan off. Compared with FHA, whose annual mortgage insurance is higher and often lasts the life of the loan, USDA's 0.35% annual fee is one of the program's quiet advantages. Both fees are set by USDA and are subject to change.

Two rules define which homes qualify. First, the property must sit inside a USDA-eligible area. This is where buyers are most often surprised: eligibility is not limited to remote farmland. Huge swaths of exurban Texas and Arizona — the towns just past the edge of a metro — are eligible, while the definition excludes the denser urban cores. Because boundaries are set at the exact-address level and are periodically redrawn, two homes on the same road can land on opposite sides of the line.

Second, the home must be your primary residence. USDA Guaranteed financing cannot be used for investment properties, rental homes, or vacation second homes. The property also has to meet basic safety and soundness standards on the appraisal — it must be a modest, move-in-ready home rather than a fixer that fails inspection. Most single-family homes, many approved condos, and qualifying manufactured homes can work. Before you write an offer, verify the exact address on the official USDA map.

Both programs live under Section 502, which is why they are so often confused, but they are two different loans. The Guaranteed program — the one we originate — is funded by an approved private lender and serves moderate-income buyers with household income up to 115% of area median. You apply through the lender, underwriting runs through USDA's Guaranteed Underwriting System, and USDA stands behind the loan with its guarantee.

The Direct program (502 Direct) is funded directly by USDA rather than a bank, and it targets very-low- and low-income households, generally below the limits used for Guaranteed. You apply through a local USDA Rural Development office instead of a lender, the process tends to run longer, and eligible borrowers can receive payment-assistance subsidies that temporarily reduce the monthly payment. If your income falls in the very-low or low tier, Direct may be worth exploring with USDA — but the loan most Texas and Arizona buyers close is the Guaranteed program described on this page.