Usda Loan Pros And Cons

For eligible rural homebuyers, there is a mortgage option known as a USDA home loan. For low-income borrowers, this mortgage with no down payment features competitively low rates and benefits like waived mortgage insurance.

Rural Development Guaranteed Housing Loan Program of the U.S. issues USDA mortgages. S. Department of Agriculture. Potential homebuyers may find this mortgage assistance program to be a useful resource.

It aids in making home ownership more affordable for those with low to moderate incomes in qualified rural areas. A low-interest USDA loan can be used to purchase a home or refinance an existing one.

The property must be situated in an eligible rural area with fewer than 35,000 residents, according to applicants.

Borrowers don’t need to worry about making a down payment, and those who qualify may be able to purchase a home despite having poor credit.

What Is a USDA Loan?

In 1991, the U. S. To increase homeownership in rural America, the Department of Agriculture established the Single-Family Housing Guaranteed Loan Program. As a result, individuals with low and moderate incomes who might not be eligible for a conventional mortgage can apply for a government-backed loan to buy, build, or renovate a home in a rural area.

During the 2019 fiscal year, lenders issued nearly 100,000 loans under this program. USDA mortgages do not require a down payment, and they usually come with low interest rates.

For applicants with the lowest incomes, repayment terms for USDA loans may be as long as 33 years or even up to 38 years. If the borrower defaults, the USDA is required by its terms to guarantee 90% of the loan.

How Does a USDA Home Loan Work?

A USDA home loan can be used entirely to finance the purchase of a home by both first-time and repeat buyers. A down payment is not necessary for a USDA home loan, in contrast to other home loan types. Since this mortgage assistance program forbids adjustable-rate mortgages, borrowers must take out a fixed-rate loan.

There are three main mortgage programs under USDA:

Single-Family Housing Direct Home Loans: These loans help low- and very-low-income applicants get mortgages. The property must be located in an eligible rural area, and income requirements vary based on where the borrower lives. The repayment period could be up to 33 years, possibly extending to 38 years for qualified borrowers.

Section 502 Guaranteed Rural Housing Loan: This program helps low- and moderate-income applicants receive 100% financing on their homes with no down payment. Repayment for these loans is offered at 30-year fixed-rate terms only. As with direct home loans, applicants for the guaranteed loan must meet income requirements, and the property must be located in an eligible rural area.

Section 504 Home Repair Program: This loan helps qualified borrowers finance home repairs, improvements and modernization. The borrower must be the homeowner, occupy the house and have a household income lower than 50% of the local median income. Loan amounts can’t be more than $20,000 in a 20-year repayment period.

How to Qualify for USDA Home Loans

There are several eligibility requirements for each Section 502 loan. For direct loans, applicant requirements include:

Must be without decent, safe and sanitary housing.

Must not be able to get a loan from other lenders with terms they can reasonably meet.

Must occupy the property as their primary residence.

Must be legally able to take on a loan

Must meet income eligibility, which is based on where they live

Must meet citizenship or eligible noncitizen requirements

Must not be suspended or barred from taking part in federal programs

Property requirements include:

Must be in a rural area with a population of less than 35,000

Must be 2,000 square feet or less

The property must have a market value less than the applicable area loan limit

The property cannot include an in-ground swimming pool

The property cannot be designed for income-producing activities

The borrower must be a U.S. citizen, have sufficient income, and consent to use the property as their primary residence in order to qualify for guaranteed loans. S. citizen, a U. S. noncitizen national or a qualified alien. The property must be located in an eligible rural area.

A loan from the Federal Housing Authority (FHA) may be a good choice if you are not eligible for a USDA loan.

A person who wants to relocate to or keep a home in a rural area that qualifies for a USDA mortgage is the best candidate. For a borrower who has been unsuccessful in obtaining home loans from other sources, it is an appropriate option. In general, the borrower must have the following qualities:

A minimum credit score of 640 for more streamlined processing

A debt-to-income (DTI) ratio that is no higher than 41%

An employment record of at least two years

Willingness to go through stringent underwriting standards and strict requirements

Interest Rates for USDA Home Loans

Qualified applicants for USDA home loans must take out a fixed-rate loan with a 15- or 30-year repayment period. The lender will base the interest rate on a number of variables, such as the borrower’s credit rating, employment history, and financial situation.

Even though there is no requirement for a down payment with a USDA loan, it’s important to keep in mind that you will incur some closing costs. Your closing costs consist of the costs associated with completing a mortgage. Depending on your location, you’ll need to pay anywhere from 1% to 3% of the loan’s total amount.

The following are significant points to bear in mind regarding current USDA mortgage interest rates:

As of July 1, 2022, the current interest rate for Single Family Housing Direct home loans is 3.25%. This rate applies to low-income and very-low-income borrowers.

Interest rates may be based on either the current market rates at loan approval or the current market rates at loan closing. The lower rate is applied.

Borrowers can enjoy an interest rate as low as 1% when the loan is modified using payment assistance.

To get the lowest possible interest rate, the borrower must have a low DTI ratio and a high credit score.

For more information, check out the U.S. Department of Agricultures single-family housing programs.

Type of LoanRateAPR

Conventional 5/1 ARM6.182%6.268%

Conventional 15-Year Fixed5.633%5.812%

Conventional 30-Year Fixed6.339%6.437%

FHA 5/1 ARM5.324%7.366%

FHA 15-Year Fixed5.509%6.645%

FHA 30-Year Fixed5.574%6.723%

VA 5/1 ARM5.125%6.255%

VA 15-Year Fixed5.91%6.433%

VA 30-Year Fixed5.754%6.032%

See

Advantages of USDA Home Loans

Many homebuyers may find that USDA loans are preferable to conventional mortgages or other government loan programs like FHA or VA loans. These advantages include:

Zero down payment: Unlike other mortgage loans, borrowers won’t need to provide a down payment for USDA loans. Coming up with a hefty down payment can be a barrier for many people looking to purchase a home.

Low credit score: USDA loan programs do not mandate a minimum credit score to qualify for a mortgage. However, you must demonstrate the ability and willingness to repay the loan.

Flawed credit history can still be OK: A low credit score often reflects poor credit history, which can deter lenders from offering conventional mortgages. However, the USDA uses its Guaranteed Underwriting System to see if a borrower qualifies for a loan. There is more flexibility in reviewing qualifications to help borrowers as much as possible.

Low origination fee: With USDA loans, borrowers pay a guarantee fee of 2% of the total loan amount. However, this fee doesn’t have to be paid up front; it can be rolled into the mortgage loan amount.

Rates: Rates on USDA loans are typically lower than those on conventional or FHA loans. This is good news for borrowers with lower credit scores because they can receive those same low rates as borrowers with excellent credit scores.

Streamlined refinancing process: The USDA’s streamlined assist refinance loan program speeds up the process to approximately three weeks for homeowners looking to refinance their mortgage. You won’t need credit reports, a home appraisal or a property inspection.

Disadvantages of USDA Home Loans

There are some USDA loan disadvantages that borrowers might not experience with conventional mortgages or mortgages obtained through other government programs, like FHA and VA. These include:

Geographical requirements: Homes must be located in an eligible rural area with a population of 35,000 or less. Also, the home cannot be designed for income-producing activities, ruling out certain rural properties.

Second property/vacation homes not allowed: The property must be used as the borrower’s primary residence.

Income limits: Borrowers must meet specific income requirements based on where they live. If you exceed the income limits, you will not qualify for a USDA loan.

USDA up-front fee: Borrowers must pay an up-front fee for a USDA guaranteed loan or have that fee rolled into the mortgage loan amount. Depending on that loan amount, this could be several thousand dollars.

Streamlined refinancing limitations: To qualify for a refinance, you must have a record of 12 consecutive, on-time mortgage payments, and the home must be your primary residence. This program only applies to mortgages with 30-year terms and is not available in all states.

Alternatives to USDA Home Loans

There are other mortgage options besides USDA loans, such as conventional mortgages, FHA mortgages, and VA mortgages. Of all of these options, USDA mortgage interest rates are the lowest.

Only a VA loan can compete with a USDA home loan’s requirements (such as down payments or credit scores). However, only qualified surviving spouses, service members, and veterans are eligible for this option.

FHA and conventional loans tend to have higher interest rates. They can also be hard to qualify for. A different mortgage product might be more appropriate for you given your particular circumstances.

Conventional Home LoansConventional home loans are the most popular financing option for first-time homebuyers. They typically feature low rates and wide availability, adhering to Freddie Macs or Fannie Maes guidelines. You can qualify with as little as 3% down. Keep in mind that conventional home loans are best for individuals with a high credit score.

FHA Home LoansFHA home loans are a good option for homebuyers with low credit scores and who can’t afford a high down payment. Those with credit scores over 579 can apply with 3.5% down, while those with scores between 500 and 579 need to put at least 10% down. FHA guidelines also allow higher debt-to-income ratios compared to other mortgage programs.

VA Home LoansVA home loans have no loan amount limits or minimum credit score requirements. The Department of Veterans Affairs backs the loans, which are available to service members and honorably discharged veterans. Aside from home purchasing, VA loans can be used for construction and other real estate transactions.

Next Steps to Get Your USDA Mortgage

Before speaking with a lender, it’s a good idea to do some research to see if a USDA mortgage is a good fit for you. 1.

Calculate your USDA mortgage payment

The mortgage calculator on MoneyGeek can help you determine your projected monthly loan payments. 2.

Check current mortgage rates

Mortgage rates fluctuate frequently, so learn about them today to see how they might impact your USDA loan. 3.

Determine how much mortgage you can afford

Lenders look at your debt and income to determine whether you have the money to pay back your loan. To find out how your debt-to-income ratio will fare, use MoneyGeek’s calculator. 4.

Use USDA’s eligibility map

With the USDA Eligibility Site, you can enter a specific address to determine if the location is eligible or search the map to check out general eligible areas.5

Shop for better rates

You can use conventional loan lenders to look for more favourable terms. 6.

A pre-approval lets you know how much you can afford and convinces potential sellers that you are a serious buyer. To get pre-approved, you must present your lender with proof of your income, assets, and credit. 7.

Find a home in an eligible area

Find a home in a rural area that qualifies and use your pre-approval letter to demonstrate that you are a USDA buyer who can close.

Expert Insights on USDA Loans

MoneyGeek consulted with professionals in the field and academics to provide authoritative advice on USDA loans. The individual contributors’ opinions and insights constitute the entirety of the views expressed.

Why should borrowers consider a USDA mortgage loan?

Who are the best candidates for USDA mortgage loans?

How can a borrower best prepare to qualify for a USDA mortgage loan?

Are there any drawbacks to getting a USDA mortgage loan?

Visiting Assistant Professor of Economics at Loyola Marymount University

Associate Director of the Mortgage Bankers Association’s Government Housing Programs

FAQs About USDA Loans

Your next best step in determining whether you could benefit from a USDA home loan is to learn the answers to some of the most frequently asked questions about them.

Its possible. It might be a good choice for first-time homebuyers due to the lack of a down payment and the ability to include closing costs in the monthly loan payments rather than paying them up front. Additionally, purchasers of homes with weak or even damaged credit histories may still qualify for USDA loans.

USDA loans typically cost less than FHA and conventional loans because they require lower down payments and have fewer or no upfront costs. Additionally, borrowers are eligible for 100% financing, and closing costs and mortgage insurance premiums may be rolled into the loan.

USDA loans typically take 35 to 40 days to close.

That depends on your circumstances. The property must be in a rural area as defined by the USDA, you must meet the USDA’s credit and debt-to-income ratio requirements, and your household income must be below the USDA threshold for the type of USDA loan you are seeking.

Borrowers can use USDA loans to finance a condo. The requirements for single-family homes are generally the same. But in order to decide whether a condominium qualifies for financing, the USDA will look to the Federal Housing Administration’s guidelines.

Professional journalist Karon Warren has spent the past 20 years writing about a variety of topics, including personal finance, banking, mortgages, health insurance, and home and auto insurance.

Karon graduated from the University of Southern Mississippi with a bachelor of arts in journalism. She belongs to the American Society of Journalists and Authors as well. Karon uses her background as a journalist to craft in-depth, thoroughly researched financial stories that inform readers and help them make decisions that will best advance their financial objectives.

U.S. Department of Agriculture Rural Development . “USDA Highlights Investments and Accomplishments in 2019 to Build Rural Prosperity.” Accessed July 7, 2022 .

U.S. Department of Agriculture Rural Development . “Single Family Housing Direct Home Loans.” Accessed July 7, 2022 .

©️ Zillow, Inc., 2006-2016. Use is subject to

FAQ

What is the downside to a USDA loan?

Geographical limitations are the primary drawback that discourages people from applying for USDA loans. Anyone who wants to purchase a home in a more urban area is ineligible for a USDA loan because they are only intended for rural areas, on the whole.

Are USDA loans a good idea?

For purchasers with a moderate or low income, a USDA loan is a fantastic option. Only one other loan program (the VA loan) allows you to purchase a home with no down payment and low interest rates. It may be worthwhile to investigate a USDA-guaranteed loan if your house is in a qualifying area.

Is it better to use USDA loan or conventional?

A USDA loan might be your best option if you have no down payment options, a low to moderate income range, and want to buy a house in a rural area. However, a conventional loan might be the best option for you if you have money to put down and don’t want to be constrained in where you can buy.

Is USDA better than FHA?

Mortgage insurance premiums for FHA loans are higher than those for USDA loans, especially if you put down less money. If you put down the minimum 3. 5%, your monthly mortgage insurance premium will be 0. 85% of the loan amount. For the duration of the mortgage, you must pay the premium.