If you’re searching for a new home, you may be wondering whether a USDA loan is the right option for you. In this article, we’ll cover exactly what a USDA loan is, how to qualify, and more.
A U.S. Department of Agriculture (USDA) loan is designed to support rural land development. USDA home loans are ideal for low-to-moderate-income buyers or first-time buyers.
Despite their rural focus, these loans are not reserved just for farmers – they are also accessible to other home buyers. Thanks to the expansion of the USDA program, borrowers looking to purchase a property or refinance one in rural or even suburban areas could qualify for a USDA home loan – even if they don’t meet the standard for a traditional mortgage loan.
Chief among the perks associated with a USDA home loan is the no down payment feature, differentiating USDA home loans from other mortgage products.
In addition, interest rates on USDA home loans tend to be lower compared to other mortgages. The credit requirements are also generally more relaxed.
A common concern about USDA loans is whether they include Private Mortgage Insurance (PMI). The short answer? No.
Conventional loans that are not backed by the government require PMI. This type of insurance safeguards the lender if the borrower defaults on the loan. A USDA loan does not have the PMI requirement, considering this is a feature associated with homebuyers who are putting down less than 20 percent of the purchase price of the home.
While USDA loans forego PMI, the other insurance requirements associated with this loan are two-pronged. Borrowers must pay what’s known as an upfront guarantee fee and an annual fee to cover the mortgage insurance premium.
The upfront guarantee fee, which could also be called the USDA funding fee, amounts to 1 percent of the size of the mortgage loan while the annual fee costs 0.35 percent of the loan. The funding fee is typically due at closing and it could be combined with the mortgage. The yearly fee becomes part of the borrower’s monthly mortgage installments.
Despite these fees, USDA loans still tend to have lower overall costs vs. conventional mortgage products, according to Neighbors Bank’s Sam Sexauer, cited by USDAloans.com.
Conventional loan products are still the most popular type of mortgage for American homebuyers, but USDA loans cater to a specific demographic. There are some critical differences between the two different mortgage types.
The credit standards associated with a USDA loan tend to be lower, as the government is looking to promote homebuying in areas outside of cities. Potential homebuyers whose credit score needs some work could still qualify for a USDA loan, while the lending standards are more stringent for conventional loans.
While lenders will focus on an applicant’s FICO score, the U.S. government relies on its own credit method via its Guaranteed Underwriting System, which has more flexibility than other systems.
USDA loans also tend to have lower interest rates than conventional loans, allowing low-income homebuyers to borrow at a cost that rivals consumers with pristine credit.
Additionally, USDA loans have fixed rates, regardless of whether it’s a 15-year or 30-year mortgage.
Conventional loans might offer adjustable-rate mortgages. The overall costs associated with a traditional mortgage can be as much as two or three times higher than USDA home loans, preventing some low-income or first-time potential home buyers from becoming homeowners.
On the flip side, USDA loans face geographical restrictions as they are meant for properties located in rural areas. Conventional loans do not meet these same geographical limits.
In addition, the homebuyer with a USDA loan must intend to use the property as their primary residence. In contrast, a conventional mortgage could potentially be used to purchase an investment property, for example.
Deciding between a USDA and a conventional loan product comes down to the property location and the homebuyer’s earnings, credit profile, and debts.
For potential homebuyers asking themselves how to get a USDA loan, you can explore USDA loan options and all the perks they offer, including a 30-year fixed USDA mortgage. You may be surprised to learn that many suburban areas may also qualify for a USDA loan program.
A USDA home loan could be used to finance 100 percent of a property located in an eligible area. Borrowers are not required to apply a down payment toward the property and will have a fixed mortgage rate.
There is no one-size-fits-all USDA loan. Instead, there are several types. Below is a breakdown of how several USDA home loan programs work.
If you are wondering how to qualify for a USDA loan, something to bear in mind is that the property must be located within the confines of the government’s eligible rural areas.
The USDA defines a rural area as “open country or any town, village, city, or place, including the immediate adjacent densely settled area, which is not part of or associated with an urban area.”
Beyond that, there are personal requirements that the borrower must meet. While there are various nuances involved with these loans based on factors such as the specific loan type and state in which the property is located, below is a list of some of the standard criteria:
If you are wondering how to apply for a USDA loan, Total Mortgage is here to make the process easier for you.
Suppose the property and the borrower meet the criteria for a USDA loan, you could start the application process for a 15-year or 30-year USDA loan online at Total Mortgage today, whether you are looking to buy your first home or refinance.
Now that we have answered questions such as how to apply for a USDA loan, how to get a USDA loan, and do USDA loans have PMI, you might be ready to take the next step.
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