Credit cards are handy financial tools, thanks to the credit card issuers who offer, provide, and manage them. A credit card issuer is a type of financial institution that supplies credit cards to consumers.
Read on to learn more about how these businesses operate.
What Is a Credit Card Issuer?
Credit card issuers are financial institutions responsible for making credit cards, managing the application and approval process for credit cards, and keeping credit card accounts running smoothly. If you needed to check your credit card balance, pay your bill, or request a replacement credit card, you’d turn to your credit card issuer.
Recommended: Guide to Credit Card Purchase Protection
How Credit Card Issuers Work
The financial institutions that offer credit cards can be lending institutions, banks, credit unions, or fintech companies. The cardholder borrows money from the credit card issuer each time they make a purchase, and when they pay their credit card bill, they’re paying the credit card issuer back for some or all of the credit they have used. This makes credit card issuers integral to what a credit card is.
A credit card issuer is the one to determine an applicant’s credit card interest rate and limit, the type of cardholder benefits offered, and the fee structure for the credit card. Generally, credit card issuers aren’t the ones to process merchant transactions, but they do decide whether to approve or decline a charge.
When questions about their credit card arise, account holders can call the number on the back of their credit card to connect with their credit card issuer’s customer support line.
Why Are Credit Card Issuers Important?
Understanding why credit card issuers are so important can help consumers to better manage their relationship with their credit card issuer and choose the right credit card for their needs once they’re old enough to get a credit card.
The issuer is responsible for determining a credit card’s terms and features. All credit card issuers have different policies, customer support approaches, and types of rewards offerings. Before choosing a credit card, it’s helpful to carefully research not just how a credit card works but how the credit card issuer runs its operations, in terms of fees and rates you will be subject to.
Recommended: How Do Credit Cards Work?
Common Credit Card Issuer Fees
What the fees look like for a specific credit card will vary by credit card issuer, but the following credit card issuer fees are fairly common to come across.
Annual Fees
An annual fee is a charge that’s paid once a year for having the credit card. These fees can often range from $95 to $500 or more per year. Not all cards charge this fee, but those that do tend to come with more valuable perks and rewards.
Before signing up for a credit card with an annual fee, it’s important to crunch the numbers to see if the rewards that come with using the credit card (like cash back or travel points) will outweigh the cost of the fee. Even if you get a good APR for a credit card, a high annual fee could make the offer less sweet.
Late Payment Fees
Late payment fees apply when someone is past due on paying their bill. Usually, these fees go up each time a payment is missed. The late fee won’t ever cost more than the minimum payment due on the payment the cardholder missed, but these fees can still add up. The current average fee is $32, but it may soon be lowered to $8, pending legislation.
Balance Transfer Fees
When someone transfers their credit card balance from one card to another (usually to a balance transfer card with a lower interest rate), they can potentially owe a balance transfer fee. This fee can be either a percentage of the transferred amount or a fixed fee.
While consolidating debt through a balance transfer can make it easier to pay off credit card debt, make sure to take into consideration any fees involved.
Foreign Transaction Fees
Making purchases when traveling abroad can lead to paying a foreign transaction fee, which is usually around 1% to 3% of the purchase.
However, there are plenty of credit cards — especially travel rewards credit cards — that don’t charge foreign transaction fees. If someone travels internationally often, they could save a lot by choosing a credit card with no foreign transaction fees, which is worth considering when applying for a credit card.
Credit Card Issuer vs Credit Card Payment Networks
It’s easy to confuse credit card issuers and credit card payment networks. While a credit card issuer creates and manages credit cards, a credit card payment network is the one that processes transactions between credit card companies and merchants.
Here are the key differences between credit card issuers and credit card payment networks:
Credit Card Issuer
Credit Card Payment Network
• Creates and manages credit cards
• Accepts or declines credit card applicants
• Determines fees, credit card APR, credit limits, and rewards
• Approves and declines credit card transactions
• Processes transactions between credit card companies and merchants
• Creates the digital infrastructure that facilitates credit card transactions
• Charges an interchange fee
• Determines which credit cards can be used with which merchants
Differences Between Credit Card Issuers and Co-branded Partners
A co-branded partner is a merchant that works with a credit card issuer to create a co-branded credit card with their name on it. This is a common arrangement with store, airline, and hotel credit cards.
Here’s a breakdown of how credit card issuers and co-branded partners differ:
Credit Card Issuer
Co-Branded Partner
• Responsible for creating and managing credit cards
• Decides whether to accept or decline credit card applicants
• Determines card specifics, like fees, interest rates, and rewards
• Approves and declines credit card transactions
• Works with a a credit card issuer to create a co-branded card
• Uses co-branded card created by issuer to increase sales and attract new customers
• Can use co-branded card to deliver value to loyal customers
Finding the Credit Card Issuer Number
If someone looks closely at their credit card, they’ll be able to learn a lot about their credit card issuer, including what their credit card issuer number is and how to contact their issuer.
Credit Card Issuer Phone Number
It’s always possible to learn how to contact a credit card issuer by going to their website, but cardholders also can find their card issuer’s phone number on the back of their credit card or on their monthly statements.
Credit Card Issuer Identification Number
To find a credit card issuer number, all a cardholder has to do is look at the string of numbers on a credit card. The first six to eight digits on the card represent the Bank Identification Number (BIN), or the Issuer Identification Number (IIN). This number is what identifies the credit card issuer. The following digits on the card are what identify the cardholder.
Examples of Some Major Credit Card Issuers
There are many different credit card issuers, but these are some of the biggest ones in the U.S.:
• American Express
• Bank of America
• Capital One
• Chase
• Citi
• Discover
• U.S. Bank
• Wells Fargo
The Takeaway
When you’re choosing a credit card, looking at the credit card issuer matters. This is the financial institution that creates and manages credit cards, determines a card’s fees, interest rate, and rewards offerings, and also approves (or denies) credit card applicants. Knowing that you have a well regarded issuer with fair policies is an important step in securing a credit card that suits your needs.
Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
How do I know my credit card issuer?
If someone is unsure of who their credit card issuer is, they can look at the credit card number on their card. The first six to eight digits on a credit card — called either the Bank Identification Number (BIN) or the Issuer Identification Number (IIN) — identify the card issuer.
What is the difference between a credit card issuer and a credit card network?
Credit card networks, unlike credit card issuers, are the party that processes the credit card transaction directly with merchants. Credit card networks have digital infrastructure that allow them to facilitate transactions between merchants and card issuers in exchange for an interchange fee.
What do credit card issuers do?
Credit card issuers create, distribute, and manage credit cards. They decide what the interest rates and fees of a credit card are, who is approved for one and how much they can spend, and how the card’s rewards structure works.
Photo credit: iStock/Luke Chan
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My work on housing moves around the 10-year yield and the economics that move that. The growth rate of inflation has fallen a lot on the year-over-year data, but mortgage rates haven’t gone down, which isn’t surprising to me as my mantra has been:“Labor over Inflation.”
For 2024, the 10-year yield running between 3.80%-4.25% looks perfectly normal to me as long as the economic data is firm and the Fed hasn’t pivoted. I can’t see the 10-year yield below 3.37% unless the labor market breaks — meaning jobless claims over 323,000 on the four-week moving average. That means I can’t see mortgage rates going below 6%, especially with the spreads being bad, until the labor market or the economy gets weaker.
However, now we are at the same spot as last year, near the critical 4.34% level and we have the Federal Reserve meeting coming up. This is a big week, as you can see in the chart below.
With mortgage rates above 7% again, we will have to see what the Fed says at this meeting because, in the past few meetings, they have made it clear that policy is restrained and that they don’t want it to get too restrictive. This is what happened last year when the 10-year yield headed to 5% and we had 8% mortgage rates. However, there is a risk of the Fed sounding too hawkish again which would send the 10-year yield higher.
Purchase application data
As mortgage rates have been falling recently, we saw back-to-back weeks of growth in the purchase application data, which aligns with what we saw last year. Remember, we are working from extremely depressed levels in this data line, so the bar is so low that it doesn’t take much to move the needle.
Since November 2023, we have had 10 positive and five negative purchase application prints after making holiday adjustments. Year to date, we have had four positive prints versus five negative prints. Clearly, if mortgage rates can head toward 6% and hold we will get rising demand, but I believe the Federal Reserve wouldn’t be able to sleep at night if more people were buying homes.
Weekly housing inventory data
The one positive story for me in housing this year is that inventory is growing year over year for both active inventory and new listing data. I know it’s not a lot, but growth is growth. The one benefit of higher rates is that inventory can grow in the post-2010 qualified mortgage world as long as higher rates create softness in demand. It hasn’t been a lot of growth historically, but growth is growth.
Last year, the seasonal inventory bottom happened on April 14, which was the the longest time to find a seasonal bottom ever. This means we will show more than normal inventory growth until we get past tax day 2024.
Here is a look at the inventory last week:
Weekly inventory change (March 8-15 ): Inventory rose from 500,579 to 507,160
The same week last year (March 9-16): Inventory rose from 413,199 to 414,967
The all-time inventory bottom was in 2022 at 240,194
The inventory peak for 2023 was 569,898
For some context, active listings for this week in 2015 were 982,639
New listings data
New listings are growing yearly, which is another plus for housing. Last year, II picked up on the trend that new listing data was creating a historical bottom as the data line wasn’t heading lower with higher rates. The growth is a tad lighter than what I was hoping for. But as someone who didn’t buy the mortgage rate lockdown premise that inventory can’t grow with higher rates, this year is a good test case.
Here’s the weekly new listing data for last week over several previous years:
2024: 59,542
2023: 41,415
2022: 54,542
For some historical context, new listing data this week in 2010 was 306,020.
Price-cut percentage
Every year, one-third of all homes take a price cut before selling — this is regular housing activity and this data line is very seasonal. The price-cut percentage can grow when mortgage rates move higher and demand gets hit. When rates fall, they go lower than an average year.
Inventory is higher than last year, and we might have found the bottom already, so as the year progresses, the number of homes taking a price cut should increase. The goal is to see how the mortgage rate variable plays into this data line. This is why this week’s Fed meeting is key, to see if the 10-year yield can break higher, which should increase the price-cut data.
Here’s the percentage of homes that took a price cut before selling last week and how that compares to the same week in previous years:
2024: 31%
2023: 30%
2022: 17%
Week ahead: The Fed and housing data
The Federal Reserve’s language and the dot plot are the two things to watch this week. The dot plot should still show many Fed members having two to three rate cuts in play for 2024, with some going the opposite way from that group. We also will have tons of housing data coming out this week, including the builders’ confidence, housing starts, existing home sales, and Zillow home price data. However, the key is the Fed, Fed and the Fed!
Even though Tuesday’s consumer-oriented inflation report (CPI) had the biggest potential to cause drama for rates, it was today’s wholesale inflation report that did the most damage.
The Producer Price Index (PPI) showed wholesale inflation running hotter than expected by quite a wide margin overall (0.6% month-over-month versus a median forecast of 0.3%). Even after stripping out more volatile food and energy prices (i.e. “core” inflation), PPI was up 0.3% versus forecasts of 0.2%.
These might seem like small numbers, but keep in mind that the Fed’s inflation target is 2.0% annually at the core level. Core readings of 0.4% in CPI and 0.3% in PPI pencil out to 4.8% and 3.6% respectively.
Inflation is the biggest concern for interest rates, so it’s no surprise to see rates moving higher. Today’s increase brings the average to tier, conventional, 30yr fixed rate back above 7% for the first time in a week.
LOS ANGELES — More homeowners eager to sell their home are lowering their initial asking price in a bid to entice prospective buyers as the spring homebuying season gets going.
Some 14.6% of U.S. homes listed for sale last month had their price lowered, according to Realtor.com. That’s up from 13.2% a year earlier, the first annual increase since May. In January, the percentage of homes on the market with price reductions was 14.7%.
The share of home listings that have had their price lowered is running slightly higher than the monthly average on data going back to January 2017.
That trend bodes well for prospective homebuyers navigating a housing market that remains unaffordable for many Americans. A chronically low supply of homes for sale has kept pushing home prices higher overall even as U.S. home sales slumped the past two years.
“Sellers are cutting prices, but it just means we’re seeing smaller price gains than we would otherwise have seen,” said Danielle Hale, chief economist at Realtor.com.
The pickup in the share of home listings with price cuts is a sign the housing market is shifting back toward a more balanced dynamic between buyers and sellers. Rock-bottom mortgage rates in the first two years of the pandemic armed homebuyers with more purchasing power, which fueled bidding wars, driving the median sale price for previously occupied U.S. homes 42% higher from 2019 through 2022.
“Essentially, the price reductions suggest far more normalcy in the housing market than we’ve seen over the last couple of years,” Hale said.
The share of properties that had their listing price lowered peaked in October 2018 at 21.7%. It got nearly as high as that — 21.5% — in October 2022.
Last year, the percentage of home listings that had their asking price lowered jumped to 18.9% in October, as the average rate on a 30-year mortgage surged to a 23-year high of 7.79%, according to Freddie Mac.
Mortgage rates eased in December amid expectations that inflation has cooled enough for the Federal Reserve begin cutting its key short term rate as soon as this spring. Those expectations were dampened following stronger-than-expected reports on inflation and the economy this year, which led to a rise in mortgage rates through most of February.
That’s put pressure on sellers to scale back their asking price to “meet buyers where they are,” Hale said.
That pressure could ease if, as many economists expect, mortgage rates decline this year.
As the new year began, the late 2023 assumption of multiple rate cuts from the Fed quickly gave way to the notion of needing “just a bit more confidence” that inflation was sustainably on the path to 2.0% before rate cuts could commence. That shift in verbiage coincided with a shift in inflation numbers in January’s data. Now that February’s inflation data is mostly in, we find inflation running nearly as hot as last month at the consumer level and even hotter at the producer level. Today’s PPI confirmed the latter and the bond market didn’t love it. Jobless claims added insult to injury with a big drop in continued claims and big revision (lower) to last week’s 1.9m+ reading. All this with less than a week to go before the next Fed announcement and dot plot.
Core MM PPI
0.3 vs 0.2 f’cast, 0.5 prev
Core YY PPI
2.0 vs 1.9 f’cast, 2.0 prev
Headline PPI MM
0.6 vs 0.3 f’cast, 0.3 prev
Retail Sales
0.6 vs 0.8 f’cast, -1.1 prev
Jobless Claims
209k vs 218k f’cast, 217k prev
Continued Claims
1811k vs 1900k f’cast, 1906k prev
08:35 AM
After the data, 10yr at 4.223% (up 3.5bps on the day). MBS down 6 ticks (.19).
09:45 AM
Additional weakness. 10yr up 7.3bps at 4.261. MBS down 10 ticks (.31).
11:57 AM
More weakness. MBS down 15 ticks (.47) and 10yr up almost 11bps at 4.294.
02:28 PM
MBS are down 17 ticks (.53). 10yr yields are up 11.2bps at 4.30.
Download our mobile app to get alerts for MBS Commentary and streaming MBS and Treasury prices.
After a few real-life conversations and my running the math, I’ve decided that a “50/50” rule for college saving achieves the best of both worlds.
The rule is:
~50% of your college savings goals should be saved via a 529 plan.
The other ~50% should be saved via a taxable brokerage account.
Why is that the case? Let’s discuss what we do and don’t want from our college savings plan.
PS – if you want further background reading on 529 plans, here are some other useful articles…
What We Do and Don’t Want from College Savings
We do want to save for college. Ground-breaking stuff.
We do want to reduce our income taxes.
We do want our investments to grow tax-free.
We do want flexibility while we save, in case life throws us a curveball.
We don’t want to end up with permanently frozen assets. We don’t want “leftover” 529 dollars.
529 College Savings Plans offer some of these ideals. But not all.
In fact, 529 plans are terrible at achieving some of the abovementioned goals.
Reducing Income Taxes
Many states offer income tax deductions on 529 contributions. In New York, for example, the first $10,000 contributed to 529s per year is exempt from state tax. That’s a ~$600 annual savings (depending on tax bracket).
Tax-Free Growth
529 investments grow tax-free, just like 401(k) or IRA assets. There’s no annual tax on dividends and interest. This leaves more dollars behind to compound.
Let’s Measure That Tax Savings
If we apply these two tax advantages to a reasonable scenario**, it’s realistic to expect a 529 account to result in 15-20% more dollars for college than a taxable brokerage account.
**see this Google sheet for detail.
But taxable brokerage accounts have distinct advantages on our other ideals.
Flexibility & “Frozen” Assets
Taxable accounts are very flexible. You can withdraw from them anytime (e.g. during an unexpected emergency). 529 dollars, on the other hand, must be spent on educational expenses and cannot be withdrawn for other reasons.
What if your kid decides to skip college? Unused funds in a 529 can be impossible to withdraw without taxes and penalties. Taxable accounts avoid this situation.
What’s the 529 Withdrawal Penalty?
Every 529 withdrawal—whether for education purposes or not—is made pro rata between your contributions and your earnings. The contributions are never taxed and never penalized, but the earnings can be if your withdrawal is not for a qualified educational expense.
For example:
Your 529 plan has $100,000 of contributions and $50,000 of earnings. (Two-thirds and one-third)
You make a $30,000 withdrawal. You have no choice in that $20,000 will come from contributions and $10,000 will come from earnings (Two-thirds and one-third)
If your withdrawal is not for qualified education expenses, the $10,000 earnings portion will be taxed as income (more marginal tax dollars, ouch!) and will suffer a 10% penalty.
If you run the math, you’ll see this penalty eats away at all the 529’s tax benefits. You do not want to suffer this penalty.
Finding Balance Between 529 and Taxable
The question is how to balance these various pros and cons. The 50/50 Rule does so!
Let’s say you aim to gift your children $100,000 over their four years of college. How generous! I submit you should aim to have:
$50,000 of that gift coming from a 529
And $50,000 from a taxable brokerage
You know it won’t be a perfectly ideal scenario. Whatever reality throws at you, you’ll wish you had decided to go all-in on the 529 or all-in on the taxable.
But you don’t know the future! This fact – that we’re more mortals without a crystal ball – is one of the fundamental frustrations in financial planning. If we knew the future, we could make a perfect financial plan. But we don’t, so we can’t. Our best solutions, therefore, involve hedging our bets. We’d rather know we’re 50% correct than be surprised later we’re 100% wrong.
The 50/50 Rule guarantees a middle-of-the-road solution. You’ll capture tax benefits and retain flexibility.
If Johnny gets a little scholarship and only needs 70% of your saved money, great! Use the 529 dollars completely. Dip into the taxable account when needed, and keep the remaining taxable dollars for other goals in life. You’ll be confident your 529 account will be completely drained, avoiding frustrating taxes and penalties.
Does It Have to Be 50/50?
I’ll admit: dividing the two accounts down the middle, 50/50, is an easy shorthand. You can choose a different fraction. But when thinking it through, my primary concerns are:
You need to be confident you’ll drain the 529s. If Johnny’s college will cost $200,000 and you aim to have all $200,000 in a 529, I don’t like that. There’s no margin for error.
You want to have a large enough portion in the taxable account to provide “just in case” flexibility.
Maybe 75/25 makes more sense for you. I can get on board with that. But I wouldn’t go much higher than 75% from the 529.
Working Backward
You can work backward from your future goal to discover what today’s saving rates need to be. In our hypothetical scenario of $50K in a 529 and $50K in a taxable (for college in ~15 years, we’ll say), a reasonable starting point is to put $2000 per year (or ~$170 per month) into each account. That’s how the math shakes out.
Depending on your timeline and assumed rate of compound growth, a simple spreadsheet or question to your financial planner will inform what your savings plan should be.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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California mortgage tech firm Blend Labs narrowed its loss in 2023 by expanding its consumer banking footprint and growing its mortgage consumer base.
The San Francisco-based company reported a non-GAAP net loss of $101.3 million in 2023, down from a non-GAAP net loss of $182.2 million in 2022, according to data shared in its fourth-quarter and full year 2023 earnings call.
Its non-GAAP net loss narrowed to $21.6 million in Q4 2023, down from a non-GAAP net loss of $49.3 million in the previous quarter.
“We delivered significant efficiencies across our business, allowing us to report ahead of our guidance for non-GAAP net operating loss and keeping us on track for our profitability target in 2024,” co-founder and CEO Nima Ghamsari told analysts.
The fact that the company achieved this momentum “despite 2023 being one of the worst years on record for mortgage industry origination volumes increases our confidence in our ability to navigate the year ahead as the market looks to stabilize,” he added.
In the fourth quarter, Blend closed eight new consumer banking deals, which included signing a multiyear consumer banking deal with Citizens Bank. And it added two new top 100 financial institutions by retail customer base to grow its mortgage customer base.
The economic value of Blend’s mortgage suite, per funded loan, rose from $81 to $91 during the year ending in Q4 2023, representing continued adoption of its mortgage add-on products, the company stated.
“Not only do we have customers gaining [market] share, we’re signing new customers and they’re using more of our products,” Ghamsari said. “There is, of course, some churn in a tough environment as there’s consolidation, and some customers have gone to lower-cost or free options to manage a low-margin environment, but this is more than offset by the other vectors of our growth.”
Granular details
Of its $36.1 million in fourth-quarter revenue, Blend’s platform segment generated $25.9 million and its title segment posted $10.2 million.
Within the Blend platform segment, mortgage suite revenue decreased by 3% year over year to $17.2 million, amid a mortgage market volume decline of 20% to 25% during the same period.
For full year 2023, Blend’s platform segment revenue totaled $109.5 million, a decrease of 10% compared to the year ending on Dec. 31, 2022. Title segment revenue totaled $47.3 million, a 58% decrease compared to the previous year.
Blend’s Q4 2023 operating expenses declined to $41.6 million, less than half of the $89.6 million spent in Q4 2022. For all of 2023, operating expenses fell to $237.4 million, down from $835.8 million, which helped offset the company’s non-GAAP net loss.
As of Dec. 31, 2023, Blend had cash, cash equivalents and marketable securities totaling $144.2 million, with total outstanding debt of $140 million in the form of Blend’s term loan.
“During the fourth quarter, Blend prepaid $85 million of its term loan balance and amended the maturity date to provide for a one-year extension to 2027, provided we meet certain conditions,” said Amir Jafari, Blend’s head of finance and administration.
No change in profitability goal
Achieving non-GAAP profitability has been a long-running goal for Blend since going public in July 2021.
Executives on the earnings call reaffirmed that Blend is on track to achieve this goal, as it foresees continued growth in consumer banking and improved economics in mortgage, regardless of the macroeconomic environment.
Blend expects its first-quarter 2024 revenue to be between $32.5 million and $35.5 million — and platform revenue should finish between $22 million and $24 million. Its title business is expected to post revenue of $10.5 million to $11.5 million.
This forecast reflects Blend’s expectation of an estimated 800,000 to 875,000 industrywide mortgage originations in Q1 2024.
Looking ahead, Ghamsari hinted that Blend is preparing its customers to scale in 2025, which will be a “very different market for mortgages.”
“We’re building a next-generation refinance flow during a historically bad time for refinance volumes. Why? Because the longer this high-rate environment lasts, the larger the backlog of customers will benefit by refinancing when rates ultimately come down,” Ghamsari said.
The long-term unemployed remained at 1.2 million, making up 18.7% of the unemployed. Meanwhile, participation in the workforce held steady at 62.5% for the third month running. On the part-time front, the situation was relatively stable, with about 4.4 million people working part-time for economic reasons, such as reduced hours or the inability to find … [Read more…]
Are you eligible for the zero-down USDA home loan?
What if you could secure a USDA home loan that allows you to buy a house with no down payment, competitive mortgage rates, and reduced mortgage insurance costs?
It might sound like a dream, but it’s entirely possible with the USDA mortgage program. Designed to assist low- and moderate-income Americans in becoming homeowners, USDA loans provide incredibly affordable financing options for eligible buyers.
Essentially, USDA mortgages empower individuals to transition from renting to owning, even when they thought homeownership was out of reach.
Verify your USDA loan eligibility. Start here
In this article (Skip to…)
>Related: How to buy a house with $0 down: First-time home buyer
What is a USDA loan?
USDA loans are mortgages backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program. The USDA offers financing with no down payment, reduced mortgage insurance, and below-market mortgage rates.
Verify your USDA loan eligibility. Start here
The USDA mortgage program is intended for home buyers with low-to-average household incomes. In order to qualify, you must also purchase a home in a “rural area” as the USDA defines it. Those who are eligible can use a USDA mortgage to buy a home or refinance one they already own.
USDA loans offer nearly unbeatable benefits for qualified borrowers. So if this program sounds like a good fit for you, it’s worth getting in touch with a participating lender to find out if you’re eligible.
How do USDA loans work?
The U.S. Department of Agriculture insures USDA loans. Thanks to government guarantees and subsidies, lenders can offer 100% financing and below-market interest rates without taking on too much risk.
Verify your USDA loan eligibility. Start here
Although the USDA backs this program, it typically isn’t the one lending money. Instead, private lenders are authorized to offer USDA loans. That means you can get a USDA mortgage from many mainstream banks, mortgage lenders, and credit unions.
The application process for a USDA mortgage works just like any other home loan. You’ll compare rates and choose a lender, complete an application (often online), provide financial documents, wait for the lender’s approval, and then set a closing day.
The only exception is for very low-income borrowers, who may qualify for a USDA Direct home loan. In this case, you’d go straight to the Department of Agriculture to apply rather than to a private lender.
Types of USDA loans
For eligible individuals and families looking to buy, build, or renovate a home in a rural area, the USDA offers three main mortgage loan types. The loan programs are as follows:.
Verify your USDA loan eligibility. Start here
USDA Guaranteed Loans
Approved private lenders, such as banks and mortgage companies, provide USDA loan guarantees to qualified borrowers. A USDA guaranteed loan is one in which the government backs a portion of the loan, lowering the lender’s risk and allowing them to offer more favorable terms to the borrower. These loans frequently have low interest rates, no down payment, and more lenient credit requirements. The property must be in an eligible rural area as the USDA defines it, and borrowers must meet household income requirements that vary depending on location and household size.
USDA Direct Loans
The USDA also offers the Single Family Housing Direct loan through the Section 502 Direct Loan Program. These loans are meant to help low-income families buy, build, or fix up small homes in rural areas. The USDA, rather than private lenders, provides funding for direct loans as opposed to guaranteed loans. These loans have favorable terms, such as low interest rates (as low as 1% with payment assistance) and long repayment periods (up to 38 years for eligible applicants). Income, creditworthiness, and the property’s location in an eligible rural area determine eligibility for direct loans.
USDA Home Improvement Loan
The USDA’s Single Family Housing Repair Loans and Grants program, also known as the Section 504 program, provides financing for home improvements. This program provides low-interest, fixed-rate loans and grants to low-income rural homeowners for necessary home repairs, improvements, and modifications that make their homes safer, more energy-efficient, and more accessible. However, if you’re looking for one, you might have a difficult time finding this type of USDA home loan. They are not widely available from lenders.
USDA loan eligibility requirements
To be eligible for a USDA home loan, you’ll need to meet a number of requirements that vary depending on whether you are applying for a USDA loan guarantee or a USDA direct loan.
Verify your USDA loan eligibility. Start here
Some general requirements, however, apply to all USDA loans, specifically those based on both buyer and property eligibility.
USDA loan property requirements
Eligible rural area
The USDA defines an eligible area in rural America as having a population of 20,000 or fewer. To check if the property you’re considering falls within these designated areas, the USDA’s eligibility site provides all the necessary information. We also provide a USDA eligibility map below.
Single-family primary residence
USDA loans are exclusively available for primary residences. Neither investment properties nor second homes are eligible for this program.
Meet safety standards
The property must adhere to the USDA’s minimum property requirements, which focus on safety, structural integrity, and adequate access to utilities and services.
USDA loan borrower requirements
Income limits
You must meet USDA monthly income limits, meaning your household income can’t exceed 115% of the area median income. Conforming to USDA income eligibility requirements ensures the program is accessible to those it’s intended to serve.
Stable income
Applicants are required to demonstrate a stable and dependable income, typically for at least 24 months, before applying. This helps ensure borrowers can maintain their loan payments.
Creditworthiness
Although USDA loans are known for their flexible credit requirements, creditworthiness is still important. Lenders usually seek a minimum credit score of 640 for guaranteed loans, with USDA Direct Loans potentially having more lenient criteria.
Debt-to-income ratio
Your monthly debt, including future mortgage payments, generally should not exceed 41% of your gross monthly income. However, lenders may make exceptions based on credit score and available cash reserves.
Citizenship status
Applicants need to be U.S. citizens, U.S. non-citizen nationals, or qualified aliens with a valid Social Security number to qualify for a USDA loan.
USDA loan eligibility map
The USDA eligibility map is a valuable online resource for potential borrowers. It helps them identify if a property is situated in an area of rural America that qualifies for USDA home loans.
Verify your USDA loan eligibility. Start here
Users can enter a specific address or explore areas of the map to see if they qualify for USDA guaranteed loans or direct loans by using this interactive map.
1 Source: USDAloans.com, based on Housing Assistance Council data
USDA loan rates
Compared to other home loan programs, USDA mortgage interest rates are some of the lowest available.
Check your USDA loan rates. Start here
The VA loan, specifically tailored for veterans and service members, stands alongside the USDA loan as one of the few government-backed loan programs offering competitively low rates. Due in large part to the security that government subsidies and guarantees provide, both the USDA and VA programs are able to offer interest rates below the market average.
Other mortgage programs, like the FHA loan and conventional loan, can have rates around 0.5%–0.75% higher than USDA rates on average. That said, mortgage rates are personal. Getting a USDA loan doesn’t necessarily mean your rate will be “below-market” or match the USDA loan rates advertised.
How to get the best USDA mortgage rates
Strengthening your financial standing is essential for obtaining the best USDA loan rates. Here are some helpful techniques for improving your personal finances:
Boost your credit score.Improving your credit score is an important step toward getting the best USDA loan rates. Taking steps to improve your credit score before applying for a USDA loan often proves beneficial.
Consider a down payment. While a down payment is not required for USDA loans, it can demonstrate to the lender your commitment to repaying the loan. This could also help lenders find your application more appealing.
Minimize existing debt.Lowering your debt-to-income ratio (DTI) by paying off existing high-interest debts can make you more appealing to lenders. It demonstrates that you are capable of handling your loan and making payments on time.
Shop around for lenders.Exploring loan options with multiple participating lenders is a smart move that can save you thousands of dollars over the life of the loan. Comparing their interest rates, fees, closing costs, and loan terms can help you identify the most appealing offer. It’s possible that first-time home buyers will find better options than what USDA loans can offer.
USDA loan costs
When it comes to financing a home purchase with a USDA loan, it’s not just the mortgage rate that you need to consider. You’ll be responsible for various fees and costs, which can add up over time. Understanding these costs upfront can help you make a more informed decision and plan your budget accordingly.
Here’s a breakdown of the expenses you can expect:.
USDA mortgage insurance
The USDA guarantees its mortgage loans, meaning it offers protection to approved mortgage lenders in case borrowers default. But the program is partially self-funded. To keep this loan program running, the USDA charges homeowner-paid mortgage insurance premiums.
Verify your USDA loan eligibility. Start here
Upfront guarantee fee
One of the first costs you’ll encounter is the upfront guarantee fee. This fee is a percentage of the loan amount and is required by the USDA to secure the loan. It’s usually around 1% but can vary. You can either pay this fee upfront or roll it into the loan balance.
Annual guarantee fee
Unlike conventional loans that may not require mortgage insurance, USDA loans come with a monthly mortgage insurance premium. You can expect to pay a 0.35% annual guarantee fee based on the remaining principal balance each year.
The annual fee is broken into 12 installments and included in your regular mortgage payment.
As a real-life example, a home buyer with a $100,000 loan size would have a $1,000 upfront mortgage insurance cost plus a monthly payment of $29.17 for the annual mortgage insurance. USDA upfront mortgage insurance is not paid in cash. It’s added to your loan balance, so you pay it over time.
Inspection fees
Before the loan is approved, the property will need to be inspected to ensure it meets USDA property eligibility requirements. This inspection can cost anywhere from $300 to $500, depending on the location and size of the home.
Closing Costs
Closing costs are a mix of fees that include loan origination fees, appraisal fees, title search fees, and more. These costs can range from 2% to 5% of the home’s purchase price. Some of these costs can be rolled into the loan amount, but it’s best to be prepared to pay some of them out-of-pocket.
How to apply for a USDA home loan
Qualifying for a USDA home loan can be a great way to finance a home, especially if you’re looking to buy in a rural area. These loans offer attractive benefits like zero down payments and competitive interest rates.
However, the USDA loan approval process involves several steps and specific eligibility criteria. Here’s a guide on how to apply for a USDA home loan.
Check your USDA loan eligibility. Start here
Step 1: Check your eligibility
Before diving into the application process, it’s important to determine if you meet the USDA’s eligibility requirements. These typically include:
A minimum credit score of 640
A debt-to-income (DTI) ratio of up to 41%
Income limitations, which vary by location and household size
The property must be located in a USDA-eligible area
Step 2: Gather necessary documentation
You’ll need to provide various documents to prove your eligibility, including:
Proof of income eligibility (e.g., pay stubs, tax returns)
Employment verification
Credit history report
Personal identification (e.g., driver’s license, passport)
Step 3: Pre-Qualification
Contact a USDA-approved lender to get pre-qualified for a loan. During this qualifying process, the participating lender will review your financial situation to give you an estimate of how much you can borrow.
Check if you’re eligible for a USDA loan. Start here
Both pre-approval and pre-qualification can give you a better idea of your budget and show sellers that you are a serious buyer.
Step 4: Property search
Once pre-qualified, you can start looking for a property that meets USDA guidelines. Keep in mind that the home must be your primary residence and be located in an eligible rural area.
Working with a real estate agent who has experience with USDA loans can be a big advantage.
Step 5: USDA home loan application
After finding the right property, you’ll need to fill out the USDA loan application. Your lender will guide you through this process, which will include a more thorough review of your financial situation and the submission of additional documents.
Step 6: Property appraisal and inspection
The lender will arrange for an appraisal to ensure the property meets USDA standards. An inspection may also be required to identify any potential issues with the home.
Step 7: Loan approval and closing
Once the appraisal and inspection are complete and all documentation is verified, you’ll move on to the loan approval stage. If approved, you’ll proceed to closing, where you’ll sign all necessary paperwork and officially secure your USDA home loan.
With the loan secured and the keys in hand, you’re now ready to move into your new home!
By following these steps and working closely with a USDA-approved lender, you can navigate the USDA home loan process with confidence. Always remember to consult with your lender for the most accurate and personalized advice.
How do USDA loans compare to conventional loans?
USDA loans and conventional loans both have fixed terms and interest rates, but they’re different when it comes to down payments and fees.
Down payment
USDA loans don’t ask for a down payment, unlike conventional mortgages, which usually require a 3% down payment. FHA loans require a 3.5% down payment. VA loans, like USDA loans, also don’t require a down payment.
Home appraisal
Both USDA loans and conventional loans need an appraisal from an independent third party before the loan is approved.
The home appraisal for a conventional loan determines whether the loan amount and the home’s value match. If the loan amount doesn’t measure up to the market value of the home, the lender can’t get back their money just by selling the house. If you want to know more about the home’s condition, like the roof or appliances, you need to get a home inspector.
For a USDA loan, the appraisal does two things:
Just like with a conventional loan, it makes sure the home’s value is right for the loan amount.
It checks if the home meets USDA standards. This means the home should be ready to live in. For example, the roof and heating should work properly. The appraisal also looks at whether the well and septic systems follow USDA rules.
If you’re looking for a detailed report on the house, hiring a home inspector is still a good idea.
Fees
While conventional loans charge private mortgage insurance (PMI) when you make less than a 20% down payment, this isn’t the case with USDA loans. You don’t need PMI for USDA direct or guaranteed loans.
However, USDA guaranteed loans have a guarantee fee of 1% at closing and then an annual fee of 0.35% of the loan, added to your monthly payment. You can roll the initial fee into your loan amount.
Loan terms
The term for a USDA guaranteed loan is 30 years with a fixed rate. If you get a USDA direct loan, you can have up to 33 years to pay it back. If you’re a very low-income borrower, you might get up to 38 years to make it more affordable.
FAQ: USDA loans
Verify your USDA loan eligibility. Start here
What is the USDA Rural Housing Mortgage and who is eligible for it?
The USDA Rural Housing Mortgage, officially known as the Single Family Housing Guaranteed Loan Program, is a rural development loan aimed at helping single-family home buyers. It’s often referred to as a “Section 502” loan, based on the Housing Act of 1949 that created this program. Designed to stimulate growth in less-populated and low-income areas, this rural development loan is ideal for those looking to buy in eligible rural areas with the possibility of a zero-down payment.
What is the income limit for USDA home loans?
The income limit for USDA home loans is based on your area’s median income. To be eligible for a USDA loan, you can’t exceed the median income by more than 15 percent. For example, if the median salary in your city is $65,000 per year, you could qualify for a USDA loan with a salary of $74,750 or less.
Do USDA loans take longer to close?
USDA lenders have to send each loan file to the Department of Agriculture for approval before underwriting. This can add around two to three weeks to your loan processing time.
Can I do a cash-out refinance with the USDA program?
No, cash-out refinancing is not allowed in the USDA Rural Housing Program. Its loans are for home buying and rate-and-term refinances only.
What’s the maximum USDA mortgage loan size?
The USDA does not set loan limits, but your household income and debt-to-income ratio have a limit on the amount you can borrow. The USDA typically caps debt-to-income ratios at 41 percent. However, the program may be more lenient for borrowers with a credit score over 660 and stable employment or who show a demonstrated ability to save.
Where can I find a USDA loan lender, and what loan terms are available?
You can find a USDA loan lender by visiting the U.S. Department of Agriculture’s website, which maintains a list of approved lenders for the Rural Housing Program. The USDA Rural Housing loan offers a 30-year fixed-rate mortgage only, with no 15-year fixed option or adjustable-rate mortgage (ARM) program available.
Can I receive a gift or have the seller pay for my closing costs with a USDA loan?
Yes, USDA rural development loans allow both gifts from family members and non-family members for closing costs. Inform your loan officer as soon as possible if you’ll be using gifted funds, as it requires extra documentation and verification from the lender. Additionally, the USDA Rural Housing Program permits sellers to pay closing costs for buyers through seller concessions. These concessions may cover all or part of a purchase’s state and local government fees, lender costs, title charges, and various home and pest inspections.
Can I use the USDA loan for a vacation home, investment property, or working farm?
No, the USDA loan program is designed specifically for primary residences and cannot be used for vacation homes, investment properties, or working farms. The Rural Housing Program focuses on residential property financing.
Am I eligible for the USDA if I recently returned to work or am self-employed?
If you are a W-2 employee, you are eligible for USDA financing immediately, as there’s no job history requirement. However, if you have less than two years in a job, you may not be able to use your bonus income for qualification purposes. Self-employed individuals can also use the USDA Rural Housing Program. To verify your self-employment income, you will need to provide two years of federal tax returns, similar to the requirements for FHA and conventional financing.
Can I use the USDA loan program for home repairs, improvements, accessibility, and energy-efficiency upgrades?
Yes, the USDA loan program can be used for various purposes, including making eligible repairs and improvements to a home (such as replacing windows or appliances, preparing a site with trees, walks, and driveways, drawing fixed broadband service, and connecting utilities), permanently installing equipment to assist household members with physical disabilities, and purchasing and installing materials to improve a home’s energy efficiency (including windows, roofing, and solar panels).
Can a non-citizen qualify for a USDA loan?
Yes, along with U.S. citizens, legal permanent residents of the United States can also apply for a USDA loan.
Today’s USDA mortgage rates
USDA mortgage interest rates consistently rank among the lowest in the market, next to VA loans.
USDA loans can be particularly attractive to borrowers seeking optimal financial terms, especially in an environment with elevated interest rates. Prospective homebuyers who meet the criteria for a USDA loan may be able to secure a great deal right now.
To find out whether you qualify for one and what your rate is, consult with a trusted lender below.
Time to make a move? Let us find the right mortgage for you
1 Source: USDAloans.com, based on Housing Assistance Council data
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Summer Cartwright is senior editor for Best Products and FirstFinds and is based in New York. She has written and edited for sites including Cosmo, People, InStyle, Food & Wine, Real Simple, and StyleCaster. Her interests outside of work include running, eating dessert, and playing with her two cats, Peaky and Polly. She received her master’s degree in magazine writing from New York University, and her bachelor’s degree in public affairs journalism from The Ohio State University.