Have you stumbled upon USDA loans duringSearch? USDA loans are backed by USDA – yes, you read that right – through its Rural Development Program, which promotes homeownership development in small communities across the country. If you do not have enough money saved up for your down payment, or if you were denied a regular loan, you have a good chance of getting a USDA loan.
Contrary to popular belief, these loans are not just for homebuyers from all-rural areas – in fact, 97% of land in the USA is eligible for a USDA loan. This means that even if you move out of city limits, the chances are high that you are moving to a USDA-designated area. This is great news for growth in the number of buyers want to jump ship from overcrowded city apartments to houses with more space and land after the pandemic.
Let’s find out if this rural development home buying program is right for you.
What is USDA Loan?
USDA loans are backed by USDA and include interest rates which are often lower than traditional mortgages. And unlike the usual and FHA Home Loansboth of which usually require a down payment, you can get a USDA housing loan at 0%. It is also easier for them to apply even if your traditional mortgage has been turned down.
So why have you never heard of them? There is one major drawback: these loans are only available to low-income buyers in certain USDA rural and suburban areas. And while most of the U.S. landmass is technically rural, more 80% of the population lives in 3% of cities and urban areas. excluded from this credit program.
USDA loan types
We are going to focus here mainly on USDA guaranteed loans as they are the most common. But be aware that there are two other types: direct and home improvement loans. Low-income buyers who may not be able to obtain a regular loan may be eligible for USDA Direct Loan, funded by the USDA at a rate of just 1%. And, if you want to improve your home, you can also apply for USDA Home Improvement Loan or Grant…
Let’s go back to USDA guaranteed loans. These mortgage loans are issued through a private lender just like regular loans, but supported by the government. This provides a significant benefit to private lenders, because if you do not repay your loan, the USDA will charge you with repaying the lender. As with a regular loan, if you deposit less than 20%, you will need to pay for your mortgage insurance. Because of this government support, USDA mortgage insurance is cheaper than other types of mortgages.
What are the requirements for a USDA loan?
The USDA takes into account three main factors when determining your eligibility. First, you need to buy a home in a designated area. Further, your household income cannot exceed USDA income thresholds at the place of residence – 15% higher than the average local income. Finally, you will also need a credit rating of at least 640, although making a down payment can offset this requirement. If you meet the first two requirements but have a low credit rating, you can still qualify for a direct USDA loan or an FHA loan.
The rest of the requirements are quite pedestrian. You must be a US citizen, green card holder, or non-citizen. Your mortgage payment cannot exceed 29% of your monthly income, and the debt-to-income ratio should be no more than 41% of your monthly salary. You will also need to use the home as your primary residence, have no mortgage records or other federal program obligations, and meet any other lender-specific requirements.
How to apply for a USDA loan
When applying for a USDA loan, you are required to provide documentation proving your identity and income level, as with any financial agreement. Schedule to submit a copy of your driver’s license or passport, social security card, tax returns and pay stubs for the previous two years, and recent bank statements.
You may also be asked to provide additional documentation if you do not have a credit rating, are applying with an unconventional loan, or have an unpredictable income. You can see the full list of requirements at USDA website…
Benefits of USDA loans
No prepayment requirements
You could have become a homeowner earlier if this obstacle was not in your way.
Lower interest rates
You can lock in a lower interest rate with a USDA loan than with a regular loan, especially if you have a good credit rating. This can save you tens of thousands of dollars in interest over the life of the loan.
Less expensive mortgage insurance
Although USDA loans do require mortgage insurance, called a margin, it is much more affordable than private mortgage insurance and FHA insurance. You will pay an advance closing fee equal to 1% of the loan amount and 0.35% of the loan amount annually (as of 2021).
A more thorough assessment
Lenders order an appraisal to determine the value of the property before applying for a loan. This ensures that they don’t lend you more money than the house is worth while protecting their investment. USDA estimates stricter rules than conventional loans that can save you from pulling the trigger in a home that needs costly renovations.
Designed for low-income buyers
If a regular lender turned you down because of your income, a USDA loan may be the right option to buy a home.
USDA loan restrictions
Strict requirements for earning income
USDA loans are not for everyone. They are for low-income Americans who cannot qualify for traditional mortgage…
Limited to rural real estate
If you live in a city or outside a designated area, you are not eligible for a USDA loan.
Longer buying process
USDA guaranteed loans usually have longer application and closing processes because the loans are signed twice – first by a private lender and then by the USDA.
Pay more over time
While USDA loans are meant to make home ownership more affordable, a mortgage insurance requirement could mean you pay more over the life of the home loan.
There is no way to cancel mortgage insurance
You can cancel PMI for regular mortgages (and even sometimes for FHA loans) as soon as you reach a certain level of home equity. The USDA guaranteed mortgage commission may be cheaper, but it will last for the life of the loan.
Is a USDA Loan Right For You?
These mortgage programs are more affordable than traditional mortgages, but they are only possible if you do not exceed the maximum income and buy a house in a specific rural area. If you are just above the income threshold or want to live in a city, you need to look into other mortgage options…