If you’ve been keeping an eye on news headlines about mortgage interest rates, you know rates tend to fluctuate with the economy.
But if you’ve been thinking about getting a USDA mortgage to buy a home this year, you may be tracking those numbers — especially USDA loan rates — all the more closely.
Here’s a hint, though. News headlines don’t tell you the whole story. The variable that matters most to your USDA loan rate is you. Your credit profile, your income, your existing debt, your down payment — those carry a lot more weight than what’s happening in the market.
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What determines USDA loan rates?
Just like rates for FHA, VA, and conventional loans, the rates for USDA loans change all the time. That’s because they’re influenced by broader forces in our always-changing economy.
Specifically, the overall market for mortgage bonds affects mortgage rates. Lenders sell mortgages to investors as mortgage-backed securities (MBS), or groups of mortgages that get bundled together and sold on the secondary market.
Investors buy these securities so they can earn money on the interest homeowners pay. MBS aren’t the most high-yielding investments, but they are relatively stable, and investors crave safety during times of economic volatility.
So when demand for “safe” investments like MBS is high — as it was in the economic storm of 2020 — rates usually drop, which is why we saw historically low rates last year.
But as the economy recovers, investors may turn to more aggressive investment options and put less money into MBS. As the demand decreases, mortgage rates begin to rise.
That’s what we’ve seen this year in the post-Covid economy. However, rates are still relatively low and may remain that way at least until the end of the year.
And the truth is, your borrower profile matters much more than whatever the national mortgage rate average is on any given day.
USDA ‘effective’ rates are lower than those of FHA
One factor that most homebuyers often overlook is the “effective” rate of a loan type. The effective rate is the base mortgage rate plus the rate of mortgage insurance you pay for that loan
USDA requires 0.35% of the loan amount to be paid in mortgage insurance per year. FHA requires 0.85% in most cases.
To find the effective rate of the loan, add the base mortgage rate with the mortgage insurance rate.
USDA base rates are typically lower than those of FHA. But for easy comparison, let’s assume you qualify for 3% for both mortgages.
|Mortgage insurance rate||0.35%||0.85%|
So, even if USDA and FHA base rates are similar, you’ll likely end up with a better deal with USDA. You can thank lower mortgage insurance for that.
How your finances affect your interest rate
When you apply for a USDA Guaranteed Loan or a USDA Direct Loan, lenders will look at your:
- Credit score: The minimum credit score for a USDA loan is 620 for many lenders
- Debt-to-income ratio (DTI): Lenders will utilize an Automated Underwriting system to determine your DTI limit
- Income: USDA loan eligibility depends on your income in two ways: you must prove that you have enough income to make your monthly mortgage payments, but your household income must not exceed the USDA income limit in your area (find the 2021 income limits here)
If you have a strong credit profile — meaning an excellent FICO score, a low debt-to-income ratio, and steady income for the past two years — you’ll have a shot at the best USDA loan rates available today.
Someone with a weaker credit profile — a lower credit score, a high DTI, and a shakier employment history — may end up with a higher USDA loan rate.
Your down payment also comes into play. USDA loans are 0% down payment mortgages, which means you don’t need to put anything down to get into a home. That’s one reason they can be a great option for first-time homebuyers.
However, a lender takes on more risk by offering 100% financing. If you put some money down, even when it’s not required, you’ll be borrowing less money and reducing the lender’s risk. They may reward that with a more competitive interest rate.
How to score a competitive interest rate
To get today’s best USDA loan interest rates, you’ll want to have a strong credit profile when you make your USDA home loan applications.
Because these loans are backed by the U.S. Department of Agriculture (USDA), lenders can offer affordable interest rates on 30-year mortgages even if you don’t have a stellar financial profile — and even if you can’t make a down payment.
That’s how the USDA Rural Development Home Loans program helps homebuyers in rural and suburban areas get into their homes.
But the program can become even more affordable if you can score a lower interest rate.
To get the best USDA rate possible, work on:
- Your credit score: Keep your balances low and make payments on time to raise your score
- Your credit history: Build a record of on-time payments on all credit cards, loans, and other debt accounts
- Saving up a down payment: USDA loans won’t require a down payment, but making one of at just 3-5% may help you qualify for a lower interest rate
- Lowering your DTI: Paying off an installment loan or two could lower your debt-to-income ratio and put you in range of a more competitive rate
Why lower USDA loan rates matter
With any type of mortgage, a better interest rate means a lower monthly payment and paying less over time. This is particularly true for USDA loan borrowers.
All USDA Guaranteed Loans come with 30-year terms which means you could be living with your new USDA loan rate for up to three decades.
Sure, you could refinance or sell the home to get out of the loan in a few years. But the amortization schedule on a 30-year term can make building equity an uphill hike, especially at first.
That’s because amortization schedules front-load the interest due on the loan. The higher your rate, the more interest you’ll be paying, and the slower you’ll be building up the equity you’d need to sell for a profit or refinance into a better rate.
Not making a down payment — which is one of the perks of a USDA loan — means you’d be entering homeownership with no equity, unless your home appreciates in value immediately.
USDA loan rates FAQ
Average USDA loan rates remain near historic lows, though they have trended up some in 2021 compared to the rock-bottom rates many borrowers locked in during 2020. Still, USDA rates are hovering around the high-2s or low-3s depending on the lender and your profile, as of June 2021.
Average rates are a starting point for your rate, but your credit profile will be a much bigger factor when your lender sets your rate.
USDA loan rates tend to be among the lowest in the mortgage industry, thanks in part to the USDA government guarantee, which insures the loans. Typically, they are lower than FHA and conventional rates.
On average, expect to pay 3-5% of your USDA loan amount in closing costs. Like mortgage rates, closing costs vary based on your unique circumstances, including how much you’re borrowing.
Many areas have closing cost assistance programs for homebuyers who don’t have the money on hand for closing costs. Be sure to Google “closing cost assistance programs” in your area, or ask your loan officer or real estate agent about local resources.
Get started with a USDA loan
Interest rates, down payments, credit profiles, closing costs — all these factors affect the amount you’ll pay to buy your home.
It’s impossible to know your interest rate until you talk with a lender. But, if you’re ready to buy, your best bet is to get preapproved with a USDA lender. They’ll let you know how much you can borrow and what interest rate they can offer you.
*Pre-approval is based on a preliminary review of credit information provided to Fairway Independent Mortgage Corporation, which has not been reviewed by underwriting. If you have submitted verifying documentation, you have done so voluntarily. Final loan approval is subject to a full underwriting review of support documentation including, but not limited to, applicants’ creditworthiness, assets, income information, and a satisfactory appraisal.
USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits. Fairway is not affiliated with any government agencies. These materials are not from USDA or RD and were not approved by USDA or RD or any other government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.