Benefits Of USDA Loans
Home loans are like cars. There are lots of different kinds available, each with its own perks that attract certain buyers. Listed below are some of the top benefits of USDA loans and how they can help you on your journey to becoming a homeowner.
USDA No Down Payment Option
The most attractive benefit of the USDA mortgage is the no down payment requirement. Most mortgages will require the borrower to pay between 3% and 20% down at the time of purchase. On a home priced at $225,000, this means the borrower will have to pay between $6,750 and $45,000 upfront, just to get the loan.
However, USDA does not require a down payment. The borrower is allowed to receive a loan that is equal to 100% of the home’s asking price or the appraised value, whichever is lower. This one aspect of the USDA loan saves borrowers thousands of dollars at the time of purchase.
USDA Does not Require Private Mortgage Insurance
Conventional loans and FHA loans will require the borrower to pay private mortgage insurance if the borrower pays less than 20% down payment at the time of purchase. Private mortgage insurance is paid by the borrower to the lender, but the money is used to protect the lender. The funds are used in case the borrower is no longer able or willing to make the house payments and the home is foreclosed.
FHA charges 0.85% (95% or over loan-to-value) of the outstanding loan amount each year for private mortgage insurance. A conventional loan will charge between 0.55% and 2.25% depending on certain factors like credit score, loan-to-value ratio and debt to income ratio.
In contrast, the USDA home loan charges a one time 1% upfront fee which can be added to the home loan amount. Also, they charge 0.35% annually for a funding fee. This is much lower than the 0.85% rate from FHA and the 0.55% rate from conventional loans, saving borrowers on their monthly payments during the life of the loan.
View current USDA Upfront and Annual Fees
Competitive Mortgage Rates
The interest rates for USDA are very competitive to FHA and conventional loans. This means that borrowers will get a fixed interest rate that is either as good or nearly as good as the top mortgage loans currently available.
Intended for Moderate-Income Families
One feature that is almost unique to USDA mortgages is the fact that there is no limit on the loan size. As long as the borrowers meet the credit requirements and the income requirements, USDA does not restrict the size of the home loan.
However, there is a restriction on the amount of borrower’s income. The restrictions are based on the number of people that will live in the home once the loan papers are signed. These restrictions vary slightly from county to county and from state to state. However, there are two rules of thumbs that prospective borrowers can use:
- If the household will have less than 5 people living in it, the maximum amount of income cannot exceed $86,850 for the year.
- For 5 or more people, the maximum amount of income cannot exceed $114,650.
Keep in mind that the above numbers represent the maximum income limits in most areas. However, there are areas within each state that have higher maximum income amounts. Speak to a knowledgeable Mortgage Loan Officer to determine income limits for the area you are looking at.
It is also important to note that USDA will count all income from all adults living in a home towards this calculation. For example, if there is a mom and dad working full-time jobs, plus a 19-year-old child who has a part-time job, and a distant Uncle living in the home that gets retirement benefits, ALL the income from those people will be counted for the USDA rules.
Seller May Pay Portion of Closing Costs
Since the USDA loan was intended to help people with moderate to low incomes buy a home, it made sense to waive the need for a down payment as a way of cutting costs. Another cost-saving measure of the USDA mortgage is the allowance of closing costs to be paid by the seller, which are also known as closing cost credits.
The rules for USDA state that a seller may choose to pay up to 6% of the home’s asking price in closing costs for the loan. It is not required for the seller to make this concession, but it is allowed.
In order for the seller to pay the closing costs, it will need to be detailed in the purchase contract. Whether the seller agrees to pay a certain dollar amount, or a certain percentage is left up to the seller and buyer to negotiate (or their real estate agents).
Also, the value of the home must be sufficient enough to cover the closing costs concession.
For example, if a seller agrees to pay $5,000 towards closing costs on their home priced at $200,000 and the home is appraised for $205,000, then the buyer can apply for the USDA loan. However, if the home is appraised at only $195,000, then the seller may choose not to pay the costs in order to maximize their profit on the sale.
USDA Allows for Various Types of Homes
USDA will allow borrowers to purchase various types of homes. A single-family home, a condo and even a townhouse are all eligible for USDA financing. For condos, the whole condo building will need to meet certain requirements in order to be considered for a USDA loan. Beyond that, so long as the home is listed in an area declared Rural by the USDA, the home can be considered for a USDA loan.
Properties Eligible for USDA Financing are EVERYWHERE
Too many people are under the impression that the term “rural” used to describe the USDA home loan means a home located well away from a major city. However, that is not really the case.
A recent map published by the USDA shows that the majority of the United States can qualify for a USDA loan.
Don’t allow the term rural to put you off and feel that a home you are considering does not qualify. Talk to a lender and let them check the physical address against the USDA’s zoning map before you eliminate a home from consideration.
Flexible Credit Guidelines
The USDA guidelines do not require borrowers to have a specific credit score. However, each authorized lender will have their own mortgage overlay guidelines and most of these will state a specific credit score in order to approve a loan.
It is safe to say that people who would not qualify for a conventional loan due to their credit scores being a few points too low will find that USDA has less stringent qualifying guidelines for a home loan. Basically, lenders are looking to see if the borrower has made their monthly payments on time with other loans, such as car loans and credit cards, for the past 2 years.
USDA Mortgage After Major Credit Problems
It is possible to qualify for a USDA loan after suffering through a major credit issue such as bankruptcy or foreclosure. The timing will simply be different based on the event.
For people that have declared a chapter 7 bankruptcy, the borrower will first need to finish the bankruptcy proceedings. This typically takes 90 days. After the borrower is discharged from Chapter 7, they will need to wait a minimum of 3 years before they can apply for a new USDA mortgage.
People that have filed a Chapter 13 bankruptcy have a bit more leeway. Borrowers may request permission from the bankruptcy court to apply for a USDA loan one year after entering the Chapter 13 repayment program. Keep in mind that any other creditor may reexamine your income and debts and may request a change in the repayment plan. However, it is possible to use the payments to the Bankruptcy Court to prove your creditworthiness.
People that have suffered through foreclosure will need to wait 3 years beyond the official date of the foreclosure.
If the home was sold through a short sale transaction, then you will need to allow 2 years to pass between the short sale and your application of the new USDA home loan.
No Penalty for Early Payoff
There are still a few lenders that will impose a penalty on borrowers if the loan is paid off early. USDA does not allow such penalties. This allows borrowers to pay extra towards their home payments, if they wish, and pay the loan off sooner than the original 30-year loan.
Summing Up The Benefits Of The USDA Loan
For people with moderate incomes, the USDA home loan can be a perfect way to buy a home. The cost-saving measures of the no down payment requirement and low mortgage insurance, along with flexible approval rules, make this a great loan for a wide range of eligible buyers.
Additional USDA and Home Buyer Resources:
USDA Loan Facts
Facts Home Buyers Don’t Know by Michelle Gibson
Home Buyer Tips for a Sellers Market by Petra Norris
Septic Inspection Tips for Home Buyers by John Cunningham
First Time Home Buyer Mistakes
About the author: This article on “10 Benefits of USDA Loans For Home Buyers” was written by Luke Skar of MadisonMortgageGuys.com. As the Social Media Strategist, his role is to provide original content for all of their social media profiles as well as generating new leads from his website.
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Be sure to check out our state specific USDA program information. Here is our USDA Rural Developement Loan in Wisconsin page.
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