USDA Loans in Utah: Zero Down Payment for Eligible Rural Areas

What USDA Loans Are

USDA loans are home mortgages guaranteed by the USDA Rural Development program. The USDA does not lend money directly to borrowers (in most cases). Instead, USDA guarantees loans made by banks and mortgage lenders. Because the USDA is backing the loan and taking the risk of default, lenders are willing to approve borrowers with lower credit scores and to offer zero down payment financing.

The big selling point of USDA loans is the zero down payment. With an FHA loan, you need at least 3.5% down. With a conventional loan, you typically need 3-5% down. With a USDA loan, you can finance 100% of the home price, putting zero dollars down. This makes homeownership accessible to borrowers who have not yet saved a down payment.

USDA loans come in two varieties: USDA Guaranteed (the most common) and USDA Direct. USDA Guaranteed loans are offered by banks and lenders. USDA Direct loans are made directly by the USDA and are available only to borrowers with very low incomes. For most Utah homebuyers, USDA Guaranteed is the relevant program.

Two Types of Eligibility: Property and Income

USDA loans require that two conditions be met: the property must be in a USDA-eligible area, and the borrower's income must meet USDA limits. If either condition is not met, you cannot use a USDA loan.

Property Eligibility: USDA-Eligible Areas

The most commonly misunderstood aspect of USDA loans is property eligibility. People often assume "USDA rural" means farms and ranches in remote areas. In reality, many suburban areas in Northern Utah are USDA-eligible.

How to Check if a Property Is USDA-Eligible

The USDA has an online eligibility map at eligibility.sc.egov.usda.gov. You can enter a specific property address or zip code to determine if the property qualifies for USDA financing. The map shows which areas are USDA-eligible and which are not.

Generally, areas within and immediately around major cities like Ogden, Layton, and Salt Lake City proper are not USDA-eligible. However, outlying suburban areas and rural areas of northern Utah often are eligible. For example, some areas in Cache County, Box Elder County, and outlying parts of Weber and Davis counties may be USDA-eligible.

USDA-Eligible Areas in Northern Utah

In Cache County, many areas outside of Logan are eligible for USDA financing. In Box Elder County, rural areas are often eligible. In Weber County, outlying areas and rural sections are eligible, though the city of Ogden proper and its immediate suburbs may not be. In Davis County, some rural areas are eligible, though the cities of Layton, Farmington, and Syracuse proper are not.

The best approach is to ask your real estate agent or lender to check the USDA eligibility map for the specific property address. Never assume a property is or is not USDA-eligible based on the city name alone.

What Makes a Property Ineligible

Properties in cities with populations above certain thresholds are not USDA-eligible. Additionally, properties in areas designated as urban are ineligible. Some properties may also be ineligible due to specific restrictions or recent designation changes.

Income Limits for USDA Loans

The second requirement for USDA loan eligibility is income. The USDA has maximum income limits that vary by county and household size. These limits are updated annually based on area median income.

How Income Limits Are Calculated

USDA income limits are set at 115% of the area median income (AMI) for guaranteed loans. This means that if the median income for a household in your county is $100,000, the USDA limit would be $115,000. This is high enough that most moderate-income borrowers qualify, but it does exclude high-income earners.

Income Limits by County

Each Utah county has different income limits based on the area median income. Cache County has different limits than Box Elder County, which has different limits than Weber County or Davis County. Additionally, income limits vary based on household size. A four-person household has a higher limit than a one-person household.

You will need to check the current USDA income limits for your specific county and household size. Your lender can provide this information, or you can check the USDA Rural Development website. Income limits are updated every year in February, so it is important to verify the current limits.

What Counts as Income

USDA counts most sources of income, including W-2 employment, self-employment income, rental income, and retirement income. Social Security and disability payments typically count as income. However, some types of income may not count or may have restrictions on how they are calculated.

Credit Requirements for USDA Loans

USDA does not have an official minimum credit score requirement. However, most lenders who offer USDA loans have their own credit score minimums, typically in the 640+ range.

This makes USDA loans accessible to borrowers who might not qualify for conventional loans but who meet USDA income and property location requirements. If your credit score is 580-650, USDA might be more accessible than conventional financing, and you benefit from zero down payment.

Loan Approval with Lower Credit Scores

If your credit score is below 640, some lenders will require manual underwriting, which means a human underwriter reviews your application instead of an automated approval process. This takes longer but allows for approval of borrowers with lower credit scores who can explain their credit issues and show that they are creditworthy now.

USDA Guarantee Fees and Costs

While USDA offers zero down payment, there are fees involved. Understanding these costs is important because they can be substantial.

Upfront Guarantee Fee

USDA charges an upfront guarantee fee, which is similar to FHA's upfront mortgage insurance premium. The current upfront guarantee fee is 1% of the loan amount, though this rate can change. This fee is typically financed into the loan, which means it is added to your loan balance.

For a $300,000 USDA loan, the upfront guarantee fee would be $3,000. This is added to your loan balance, so you would actually be borrowing $303,000. You pay interest on this $3,000 over the life of the loan.

Annual Guarantee Fee

In addition to the upfront fee, USDA charges an annual guarantee fee that is paid monthly as part of your mortgage payment. The current annual fee is 0.35% of the remaining loan balance, though this rate can also change. This is slightly lower than FHA's annual mortgage insurance premium.

Closing Costs Cannot Be Financed

While the guarantee fee is financed into the loan, your actual closing costs (title insurance, appraisal, recording fees, etc.) cannot be financed on a USDA loan. This means you will need to bring cash to closing to cover closing costs, typically 2-5% of the loan amount.

However, the seller can pay your closing costs on a USDA loan. In fact, the seller can pay up to 100% of your closing costs and even contribute toward the guarantee fee. This makes USDA loans very attractive in seller-favorable markets where sellers are willing to concessions.

USDA vs. FHA vs. Conventional Comparison Table

Who USDA Loans Are Best For

USDA loans are ideal for specific buyers in Northern Utah. If you fit into one or more of these categories, explore USDA financing with your lender:

• You have zero down payment savings. If you have not saved anything for a down payment but meet income and property eligibility, USDA allows you to buy a home now without waiting years to accumulate savings.
• You are buying in an eligible rural or suburban area. If the property you want is in a USDA-eligible area outside major cities, USDA is an excellent option available to few other borrowers.
• Your income is moderate. If your income is moderate but not low, USDA income limits may apply to you, making you eligible when you would not qualify for other programs.
• Your credit score is 580-660. If your credit is below the conventional minimum but you find an eligible property and area, USDA can be a viable path to homeownership.
• You are a first-time buyer with limited funds. USDA is ideal for first-time buyers who lack down payment savings and want to avoid the long-term mortgage insurance costs of FHA.

Common Questions About USDA Loans

Can I Use a USDA Loan for Investment Property?

No. USDA loans are only for primary residences. You cannot use a USDA loan to purchase a second home, vacation home, or investment property.

Can I Sell My Home and Keep My USDA Loan?

No. Your USDA loan must be paid off when you sell the home. However, USDA loans are assumable in some cases, meaning a future buyer might be able to take over your loan, which could make your home more attractive to buyers.

How Long Does a USDA Loan Take?

USDA loans typically take the same amount of time as FHA or conventional loans, 30-45 days from application to closing. Some lenders may be slower, while others are faster. Lender communication and cooperation is key to a faster closing.

What if I Am Self-Employed?

Self-employed borrowers can get USDA loans, but you will need to provide two years of tax returns showing stable self-employment income. The underwriting process is more detailed for self-employed borrowers than for W-2 employees.

Key Takeaways