If you’re one of those people who’s been renting their place for seemingly forever, you might want to look into the possibility of finally owning a home through USDA loans. These loans, which are offered by the U.S. Department of Agriculture, are part of the USDA Rural Development Guaranteed Housing Loan program.
USDA loans are designed to benefit potential home buyers with low-to-average income for their area. They come with several benefits you won’t see in other loan programs. Let’s take a closer look at each one of those benefits below:
1. Zero down payment
One of the greatest draws of the USDA loan program is that it enables homebuyers to receive 100 percent financing. Most applicants have no trouble qualifying for most types of loans. However, the ability to gather enough funds for a down payment is one of the biggest hurdles for first-time homebuyers – a difficulty you won’t encounter with a USDA loan.
With Federal Housing Administration (FHA) loans, borrowers need to have at least a 3.5 percent down payment. For most conventional loans, on the other hand, a 5 percent down payment is required, at the minimum. This makes USDA home loans more accessible to borrowers.
2. Competitive interest rates and loan terms
Although actual interest rates tend to vary for every lender due to specific factors, such as your credit standing and prevailing market conditions, the USDA guarantee offers some reassurance that participating lenders will offer some of the lowest interest rates on the market. Moreover, you can qualify for a USDA loan with the usual mortgage terms; that is, 15 years or 30 years.
3. Low Monthly Fees
Private mortgage insurance (PMI) is a requirement for conventional loans if the borrower is unable to provide a 20 percent down payment. Moreover, even FHA loans are known to have high annual mortgage insurance fees.
A USDA loan won’t have a PMI as it uses two different fees instead. These fees comprise the upfront guarantee fee (1 percent of the total financed amount), which needs to be paid once the loan is closed, and the annual fee (0.35 percent of the current loan balance), which is actually lumped into your monthly mortgage payment. It’s also good to know that the USDA loan funding fee is the lowest of its kind among all government-backed loan products.
So, if you have a $200,000 mortgage, for example, the upfront funding fee would be $2,000, and the 0.35 percent annual fee would be calculated at $58 per month. An FHA loan of the same amount would cost you $3,500 upfront (1.75 percent) and $139 per month (0.85 percent annual fee).
4. Flexible credit guidelines
If you think your less-than-ideal credit history might disqualify you for a USDA home loan, you might want to check for certain. While a minimum credit score of 660 is required by the majority of typical lenders, 720 is usually the minimum if you are to qualify for the lowest interest rates.
Fortunately for you, to qualify for a USDA home loan, there is no minimum credit score. But, to avail of the USDA's automated underwriting system, you need to have at least 640 or a higher credit score. Those with credit scores lower than 640 qualify for USDA loans through manual underwriting.
5. Millions can qualify
The majority of U.S. citizens can qualify for a USDA loan, or an estimated 97 percent of the country. Of course, the goal behind this provision is to encourage population growth in non-urban areas. However, note that the USDA definition for what a rural area is, is quite broad. In simple terms, it can be any area with a population below 35,000.
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