Introduction
Are you looking to finance a property in a rural or suburban area with a population of 10,000 or less? If so, it may be worth looking into a USDA mortgage loan. The U.S. Department of Agriculture mortgage program helps countless Americans achieve their homeownership goals when a ‘traditional’ home loan might be out of the question.
Part of what makes a USDA mortgage loan such an attractive option for borrowers is flexibility. While you might not be close to a big city, the loan doesn’t require you to purchase a ranch or farm. Eligibility is based on income and location.
What is a USDA loan?
A USDA mortgage loan helps eligible rural homebuyers purchase a residence without a down payment. As with any other home loan, you must meet certain requirements. Buyers can choose from the following USDA mortgage loan options.
USDA direct loans
The USDA reserves direct loans for low- and very low-income borrowers. Income requirements vary by location, so connecting with a USDA lender in your area is critical. Those who opt for a direct loan will also benefit from competitive interest rates.
USDA guarantees
The U.S. Department of Agriculture backs every USDA mortgage loan. In turn, eligible borrowers have access to low rates and favorable terms. The only downside is that USDA buyers are responsible for mortgage insurance if they don’t have a down payment.
USDA home improvement loans
Rural homeowners can repair or upgrade their property with this USDA mortgage loan. Some borrowers receive thousands of dollars in assistance to put toward much-needed renovations. A USDA home improvement loan can keep you from depleting your savings or putting these expenses on a high-interest credit card.
What you need to know
Again, location is key. The USDA website can help determine if the property you’re interested in falls within a USDA-eligible area. Be sure the property is a condo, manufactured home, unit development, or single-family home.
While there are many benefits to enjoy with a USDA mortgage loan, fees are also involved, including an upfront mortgage insurance premium and an annual mortgage insurance fee. But don’t let the fees discourage you from moving forward with this loan option. These fees are far less than what you’d pay in FHA mortgage insurance premiums, so it’s a loan program that’s worth consideration.
Pros and cons of a USDA loan
More folks are buying their first home with a USDA mortgage loan. Just make sure you understand the pros and cons of this mortgage program before assuming it’s right for you.
Pros
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Arguably the most challenging part of buying a home is coming up with a down payment. If you’re a first-time homebuyer with minimal cash reserves, it could take years building these funds. A USDA loan is a zero down payment mortgage that can help you land your dream home faster.
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Those interested in a conventional mortgaage often must have a strong credit score. However, even if you know your score isn’t quite up to par and that you’ve had challenges with debt in the past, you may still qualify for a USDA mortgage loan. With that in mind, it could be beneficial to take some time improving your credit score before starting the application process.
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Some lenders charge a fee for paying off your loan early. Though it’s not as common as it used to be, a prepayment penalty could force you to rethink your decision to eliminate your housing payment. Fortunately, there are no such fees or penalties with a USDA mortgage loan.
Cons
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The major downside of a USDA mortgage is that you’re limited to rural areas. This limitation could present some challenges with your career or preferred lifestyle. You could also find it a welcome change going from the hustle and bustle of big city life to a slower, quieter pace in a rural setting.
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As mentioned above, USDA loans are intended for lower income borrowers. You are no longer eligible for this program if your salary is more than 115% of the median income for your area. Work with your lender on other possibilities if it’s determined that your income exceeds USDA program limits.
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Private mortgage insurance, or PMI, protects your lender in case you stopped making payments. Believe it or not, PMI can add thousands to your loan. But that’s a price many rural buyers are willing to pay, especially if gets them out of renting and paying their landlord’s mortgage.
How to qualify for a USDA loan
First, you’ll need a credit score in the mid-600s. That gives you some wiggle room if you’ve had some missed payments or challenges with high debt balances in the past. There’s nothing wrong with pausing your home buying journey to improve your score, either.
Once your credit score is in line, you need to find an eligible property. Again, the residence must be in an eligible suburban or rural location to qualify for a USDA mortgage loan. The last thing you want is to fall in love with a home only to realize it’s outside of the geographical boundaries.
The final qualification involves your income. Your household income must not exceed the limit established by the USDA for where you want to purchase a home. You can determine your income eligibility on the USDA website.
How do USDA loans compare to conventional mortgages?
Conventional mortgages are known for their competitive interest rates and low monthly payments. Borrowers can choose from a fixed rate (where the interest rate stays the same over the life of the loan) or an adjustable rate (where the rate fluctuates after an initial introductory period). The difference, though, is that a down payment is required with a conventional mortgage.
Some conventional loans have down payment options as low as 5%. But you may choose to put down closer to 10% depending on your financial situation, or even 20% so you don’t have to worry about PMI. A conventional loan could be worth exploring if a USDA mortgage loan is no longer an option.
