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USDA LOANS

USDA loans help moderate-to-low-income homebuyers purchase homes in rural areas.  Borrowers in need for this type of loan have less-than-ideal credit and cannot qualify for a conventional loan.  You will be able to finance 100% of the purchase price and enjoy reduced mortgage insurance premiums.

Thanks to the U.S. Department of Agriculture mortgage program, you can live in a home surrounded by nature instead of the busy city life.  If affordability is your concern and you have a hard time qualifying for a traditional mortgage, this type of loan helps you in a significant way.

It is essentially a zero down payment mortgage for homebuyers in rural and some suburban markets.  The loan is issued by the USDA Rural Development Guaranteed Housing Loan Program, which has helped many families buy and upgrade their homes.  The purpose of the program is to “improve the economy and quality of life in rural America.”

The loan is guaranteed by the USDA and is offered by approved private lenders.

How USDA loans work and who qualifies

You’ll be surprised to learn that many locations in the U.S. are considered “rural.”  According to USDA guidelines, areas that qualify have a population of 35,000 or less. It is estimated that approximately 97% of the United States is eligible for USDA lending, which translates into more opportunities for you.  We explore all options so that you can benefit fully from this loan program.

The type of home can be a variety of styles.  “Rural” doesn’t mean the property will be a farm on a large piece of land.  It can actually be a single-family home, condo, or townhouse as well.

A USDA loan is appropriate for you if you will use the home as your primary residence.  Buying a second home or investment property will require a different loan product.

There are income limits set for people interested in a USDA loan.  Lenders evaluate your household income, which generally cannot be more than 115% of the area’s median income.  USDA income limits depend on the size of your family, your cost of living, the market in which you are buying, and other factors.

As a USDA loan specialist we will be able to determine your eligibility and answer any questions about your income.

Types of USDA loans

There are three types of USDA home loan programs:

  1. Loan guarantees:  Similar to VA-backed loans, the USDA guarantees a mortgage issued by an approved lender.  This guarantee allows you to get low mortgage interest rates without requiring a down payment.  You will have to pay mortgage insurance premiums unless you put down at least 20 percent.
  2. Direct loans:  issued by the USDA, these loans are designed for low income applicants and can offer interest rates as low as one percent with subsidies.  The income limits vary by geographical area.
  3. Home improvement loans and grants:  this financial option offers you the ability to repair or upgrade your home, up to $27,500 is available in assistance. We can explore this option with you along with other grants for which you may qualify.

Depending on your financial goals and abilities, there is one type of loan that will benefit you the most.  We will review your unique case and gather my research to choose the precise fit.

Pros

  • No down payment required, you can finance 100% of the purchase price.  For some families, gathering money for a down payment can be one of the biggest obstacles to buy a home.  The USDA loan program makes homeownership more accessible for those with moderate-to-low incomes.
  • Low interest rates compared to other no down payment programs.   Interest rates for a USDA mortgage are low because you are required to pay upfront and ongoing insurance fees. These loans are insured by the USDA, which is another reason why lower interest rates are offered.  The lower rates decrease your monthly mortgage payments and can save you thousands of dollars in interest over the life of the loan. Our job is to shop for a lender that offers the lowest USDA rates and fees as well as compare the terms to other no down payment programs.  By comparing lenders and programs we will help you save money and choose the mortgage that is best for you.
  • Lower mortgage insurance fees compared to other no down payment programs.   Although the USDA requires you to pay upfront and ongoing mortgages insurance fees, you can rest assured they are lower than other loans.  In most cases, the monthly USDA mortgage insurance fee is usually lower than what private mortgage insurance (PMI) would be for a similar loan.
  • No set loan limits by the USDA that restrict the size of the mortgage you can borrow. The USDA home loan program does apply income limits, but not having loan limits makes it available to those who may want to buy a more expensive home.

Cons

  • Strict qualification requirements compared to other no down payment programs is one of the drawbacks of a USDA loan.  Your credit score and debt-to-income ratio requirements tend to be more demanding than other similar loan products.
  • Income limits restrict the borrower to 115% of the median household income for a particular area.  If your income is too high, you’ll need to find other loan products.
  • Two kinds of mortgage insurance are required, which is what the USDA calls a “guarantee fee.”  It is the same as mortgage insurance, with the difference that this guarantee fee is to be paid for the life of the loan. There is an upfront fee and also an ongoing fee.  In conventional loans, private mortgage insurance is removed once you accumulate 20% home equity.
  • Two types of underwriting are needed to approve the loan.  Both the USDA and the private lender have to underwrite the loan.  This may mean a longer and more complex approval.

These main advantages and disadvantages of USDA loans give you an overall idea of what to expect with this product.  For some borrowers the main focus should be to first see if they qualify so that they can then compare the terms to other loan types.  We will take you through the whole process with simplicity and explore all options with you. USDA are not commonly used and we find them to be a hidden treasure for some borrowers.