What Are the Pros and Cons of a USDA Loan?
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While the goal is to boost population in non-urban areas, the USDA's definition of rural areas casts a broad net. In fact, a "rural" area is defined as any area with a population of less than 35,000 people. That means that an estimated 97 percent of the country could qualify for a USDA loan.
While that may sound like a lot, it is significantly less than the 0.45%-to-1.05% fee that comes with an FHA loan. Sometimes called rural housing loans, these mortgages are designed for homebuyers in more rural parts of the country, as well as those with low to moderate incomes. There is also the USDA’s own mortgage insurance fee, also known as the “guarantee fee,” which typically costs about 1% of the loan amount.
Down Payment
Most conventional lenders look for a credit score of at least 640, however you'll need something closer to 720 to qualify for the lowest interest rates. Luckily, there is no minimum credit score for USDA loans, however you need a score of 640 or higher to qualify to use the USDA's automated underwriting system. Borrowers with lower credit scores can still qualify for USDA loans using manual underwriting. Fortunately, because USDA loans do not require a down payment, covering these upfront costs may be a bit easier. You can also roll the costs into your loan balance and spread them out over time. In some cases, you may be able to ask the seller to cover some or all of your upfront expenses.
For a simple comparison, let's compare a $150,000 mortgage with an interest rate of 4.75 percent. We'll assume that you are making the minimum required down payment for each loan type and use a consistent estimate for monthly property taxes and homeowners insurance ($250). These loans are issued through USDA-approved mortgage lenders. The USDA guarantees them, meaning it will repay the lender if the borrower fails to pay back the loan. This protection allows lenders to offer more favorable interest rates and set easier qualifying requirements . The USDA is a branch of government and therefore this type of loan often offers much better interest rates than a conventional mortgage, depending on the lender.
Comprehensive Guide to the USDA Home Loan
Although it generally still requires you to have a credit score of 640 or higher, it is possible to obtain a USDA loan if your score is under that number. A home buyer is required to pay a monthly mortgage insurance that is the lowest of any loan program and it doesn’t change based on your down payment, as it does with the conventional loan. Basically, lenders are looking to see if the borrower has made their monthly payments on time with other loans, such as a car and credit cards, for the past 2 years. The loan interest rates are very competitive if you compare them to FHA loans 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 programs currently available.
While you won’t have a down payment, you will still need to have money available to pay for closing costs. However; USDA allows the seller to contribute up to 6% towards closing costs. Rates are competitive as long as you have qualifying credit and income. Resident, qualified alien, or non-citizen national seeking a mortgage for a home in a neighborhood or area zoned rural. You can only purchase the home as a primary residence and certain income limits apply.
Great! What type of property are you ?
A single-family, 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 designated in a rural area, the home can be considered for the loan. Many federal loan programs require that the buyer pay an upfront fee. These fees have various names, but are typically expressed as a percentage of the loan amount.
This loan is specifically designed for the purchase of rural residences and is available only to budding homeowners; investors can not make use of USDA loans. Most home buyers will explore all of their lending options before making a decision. Did you know that there may be special programs available to you that can save you a lot of money if you qualify?
No Down Payment
When you have a USDA loan, however, you can roll these closing costs into your loan. USDA loans are particularly geared toward low and moderate-income buyers. They enable those with few savings to purchase a home and they do so in the following ways.
Rural areas are defined as not being a part of an urban area or open country. The lender will also consider the population of the region which must not exceed 35,000. Within this broad definition, an estimated 100 million people over 97% of the nation’s land may be eligible. If any of the above mirrors your situation or finances, a USDA loan might be the perfect option for you and your family. Have you always dreamed of living in the country but thought it was too much to afford? Or maybe you’d like to live in the outer lying areas of the suburbs, but you can’t quite qualify for a standard mortgage.
FHA charges 0.85% (95 percent 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. As you can see, the two zero-down options have the lowest monthly payment given these parameters.
Because the USDA guarantees this program, lenders are able to offer some of the lowest interest rate on the market. Rates will still vary from lender to lender, however they will be lower than that of conventional loan programs. Another great aspect of the USDA loan is having the lowest monthly mortgage insurance of all government backed loans. The USDA home loan program does require monthly mortgage insurance payments like Conventional and FHA mortgages with less than 20% down payment.
Have you heard that USDA home loans are only eligible for rural areas? While that’s technically true, the USDA’s definition of rural is larger than you might think. I'm here to cover what land qualifies, eligibility requirements and highlight the benefits of a USDA mortgage.
The USDA loan is one of the most beneficial programs for homebuyers wishing to purchase a home outside of densely populated areas. A USDA loan is insured by the government and provides homebuyers with opportunities not available through other loan types. Let Univest help you determine if a USDA loan is right for you. This program allows individuals to purchase a home that is in poor condition and use the funds to fix it up. Now you can have your dream getaway home built away from the hustle and bustle. In this case the USDA combines a construction loan with a traditional 30 year fixed loan.
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