A USDA home loan is a competitively priced mortgage option that helps to make purchasing a home more affordable for low-income individuals living in designated rural areas. The U.S. Department of Agriculture backs USDA loans in the same way the Department of Veterans Affairs backs VA loans for eligible individuals such as veterans and their families.
The USDA offers three main mortgage programs:
- USDA Direct loans: These loans are issued by the USDA for qualifying low-income borrowers with interest rates as low as 1%.
- USDA Loan guarantees: These loans are issued by participating lenders and offer low interest rates and minimal down payments.
- USDA Home improvement loans: These loans are given to qualified homeowners to make repairs or improvements on their homes.
- Homes financed by USDA loans must be in eligible rural or edge of suburbia areas. You can see if a home is eligible by visiting the USDA’s eligibility site.
- USDA loans are for families who demonstrate economic need, so your adjusted gross income can’t be more than 115% of the median income in the area.
- Most lenders require a credit score of 640 or better. If your score is close to that or below, you may still qualify. Talk to a lender to discuss your options.
The USDA Loan is a great loan program that allows you the opportunity to buy a home with no money down. If you want to purchase in an eligible area, and you aren’t a member of the military, use the USDA Rural Development Loan. If you have a down payment and don’t want to live in the suburbs, consider an FHA or Conventional loan.If you're in a rural area, the USDA
USDA Loans Have No Down Payment Requirement: The USDA loan is one of the few mortgage programs still available that allows you to purchase a home without needing a down payment. Since nearly 48% of all first-time homebuyers list the down payment as their biggest hurdle, this is a huge deal.
Lower mortgage insurance premium: When you purchase a home and you don’t put 20% down, you are most likely going to have mortgage insurance. With conventional loans, this is known as private mortgage insurance or PMI. FHA calls this mortgage insurance premium.
Multiple Ways to Pay Closing Costs: Another pro about USDA Rural Development loans is that there are multiple ways to pay closing costs. While you don’t need a down payment with these loans, there are still closing costs to consider, and they can add up quickly.
Income Limit: The USDA loan is designed to help low to moderate-income families and because of this, they have restrictions on home much you can earn and still qualify for the program. It’s not just your income either, the USDA uses the income of your entire household to determine if you qualify. So if you have multiple people in your home that work, all income from working family members must be counted.
Location Restrictions: The other major drawback to the USDA Loan is the property location restriction. Since it is a Rural Development loan, you cannot use the USDA loan inside of major city limits. The USDA defines this as a city with more than 35,000 people.
Primary Residence: Only Another con is that you can only use the loan to purchase a primary residence. While it would awesome to be able to purchase a vacation home or an investment property without having to put money down, there is a good reason you can’t.
CONVENTIONAL MORTGAGE
USDA LOAN
MINIMUM DOWN PAYMENT
3.5%
0%
MINIMUM CREDIT SCORE
620 Minimum
620 Minimum.
LOCATION
Any property, anywhere in the United States
Must be in a Rural Area.
PRIVATE MORTGAGE INSURANCE
PMI if down payment is less than 20%; no PMI if down payment is at least 20%.
PMI if down payment is less than 20%; no PMI if down payment is at least 20%.
WHO BACKS THE LOAN?
Fannie Mae or Freddie Mac might buy the loan
Backed by the United States Department of Agriculture
Like with all other Mortgages and loans, a Loan Officer can help you get Pre-Approved for a loan so the lending process can happen smoothly. Water Mortgage is here to help with all your Pre-Approval needs!
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