When the U.S. Department of Agriculture (USDA) comes up in discussion, people tend to think of agribusiness concerns instead of home loans. That might be why the USDA Rural Development Guaranteed Loan program is often referred to as one of the best-kept secrets of the mortgage market. Could a USDA loan be the tool that makes homeownership a reality for you? Exploring the pros and cons of USDA loans can help you figure that out.
The Pros and Cons of USDA Loans
The USDA’s Single Family Housing Guaranteed Loan program is designed to help low- and moderate-income families residing in eligible rural areas by assisting them with the purchase of a safe, sanitary home to serve as their primary residence. The loans are issued by private lenders and backed in part by the USDA. This government backing enables lenders to offer terms that are more favorable than the borrower might otherwise qualify for. Funds from the loans can be used for a variety of purposes, including the purchase of a new or existing home, closing costs associated with the purchase, connection fees for utilities, repairs and rehabbing of the dwelling, site preparation, the purchase of essential household equipment, and the purchase and installation of energy-efficient improvements.
A Unique Definition of Rural
Before dismissing the possibility of using a USDA loan, you should understand that this program’s interpretation of rural is rather loose. While urban areas generally won’t qualify, both suburban and rural areas often do. To find out if homes in the area where you hope to buy are eligible for purchase with a USDA loan, you can check the USDA’s Property Eligibility website. Once you’ve confirmed that there are qualifying properties in your search zone, explore the pros and cons of USDA loans to see if they’re a good fit for you.
Why do borrowers opt for a USDA loan? As MoneyCrashers reports, these loans offer several appealing advantages:
- No down payment is needed. For many would-be homeowners, amassing a sizable down payment is a huge hurdle. The USDA loan program removes this hurdle by allowing borrowers to fully finance their home purchase. While some higher-income borrowers may be required to make a small down payment, most people will not need to make any down payment.
- Lower interest rates are the norm. While factors like your credit history will have an impact, the interest rates offered for USDA rates are highly competitive. In fact, they’re normally lower than those offered on a comparable conventional loan.
- Credit requirements are relaxed. While borrowers with excellent credit will be rewarded with the best terms, those with spotty credit can still secure a USDA loan. Even rent and utility payment histories and other non-credit verification methods can be used to secure approval. People with credit scores as low as 580 may be able to get approved.
- Closing costs can be rolled into the loan. Closing costs can add up. With a USDA loan, borrowers have the option of paying them out of pocket or rolling them into the loan.
- USDA loans are assumable. Assumability means that a loan can be transferred to an eligible buyer, which can make selling a home easier.
The Possible Drawbacks
What might discourage someone from using a USDA loan? As The Mortgage Reports explains, there are a few drawbacks associated with this form of financing:
- Only primary residences can be purchased. USDA loans cannot be used to purchase a vacation home or rental property.
- There are geographical restrictions. Homes in urban centers won’t qualify. Only properties in areas deemed acceptable by the USDA can be purchased.
- There are income limits. Maximum acceptable incomes are set to 115 percent of the median income for the county or area.
- Mortgage insurance is factored into the cost. Borrowers using a USDA loan will pay an upfront fee and a monthly fee for mortgage insurance.
Are you interested in learning more about USDA loans? Would you like to discover other financing options? PrimeLending Twin Cities would be happy to assist you with exploring the possibilities. To get started, contact us today.