Affordable USDA Mortgages

USDA loans are unique in that they require absolutely no money down from the buyer. Traditionally, mortgage loans have required upwards of 20% down. With an evolving housing market, however, several low-cost loan programs have emerged, including the USDA, FHA, and VA loans, making homeownership attainable for many who weren’t eligible before.

The USDA mortgage loan is insured by the U.S. Department of Agriculture and is targeted toward helping rural Americans achieve homeownership and, consequently, growing rural economies. Without the burden of large down payments, more families are now able to afford to buy homes. Statistically, homeowners are likely to be more actively involved in their communities. Also, these communities necessitate countless jobs to operate and expand. By providing home purchase assistance programs, the USDA also promotes urban growth and prosperity.

The USDA loan features a guarantee fee which is charged to the buyer based on the purchase price of their home. Similar to comparable programs’ mortgage insurance, the USDA guarantee fee is two-fold, consisting of an upfront fee and an annual fee. Currently, USDA’s upfront fee is. 50% of the purchase price and the annual fee is .35%. Unlike FHA and Conventional loans, the upfront guarantee fee is financed into the total loan amount. For example, if a home’s purchase price is $200,000, the upfront guarantee fee will be $1,000. Since it’s financed into the loan, the buyer will only pay an additional $33 a month over 30 years instead of paying the fee at closing. Similarly, the annual fee is financed into the loan amount and paid out over time.

Many buyers are apprehensive about paying mortgage insurance, but it is a requirement for all mortgage loans with less than 20% down, including FHA and Conventional loans. Although it may seem burdensome, buyer-paid mortgage insurance actually helps keep low-cost mortgages afloat. For USDA loans, the guarantee fees paid go toward funding new home loans. USDA homeowners can find relief knowing that USDA guarantee fees are the lowest on the market, even beating FHA by nearly a point. This can mean hundreds of dollars in monthly savings for the same purchase price. Also, since USDA evaluates fees yearly to see if there needs to be adjustments, USDA homeowners can refinance their loans into lower costs and better terms if fees drop in the future.

USDA loans continue to be favored because they are not only affordable, but also require easily met qualifications. Since credit is a big approval factor for mortgage loans, buyers are often concerned with whether or not their credit qualifies for a loan. Good credit is important for USDA mortgage approval, but the standards are much more lenient than compared to comparable loans. Where the minimum accepted credit score for most other loans is upwards of 640, USDA buyers’ scores can be as low as 620, which is below national average. Since USDA is government-insured, they are able to approve buyers with lower credit scores. Additionally, credit events such as bankruptcies, foreclosures, and judgements aren’t immediately disqualifying. To be approved for a USDA loan, buyers must not have any new collection accounts added within 12 months and may not have any late payments over the previous 30 days. All judgements must be settled or paid prior to loan approval. The wait time for loan approval after a bankruptcy is much shorter than for other loans. For USDA, a buyer must wait 3 years after bankruptcy discharge to obtain a new mortgage; conversely, the same buyer must wait 7 years to acquire a conventional mortgage.

USDA favors moderate and lower-income buyers. Since the USDA is committed to enhancing rural communities, they have instated income guidelines that will disqualify anyone making over a particular amount for their designated area. This practice is to ensure that borrowers who really need assistance are the ones receiving it. Income guidelines are loosely based on the per capita income in a geographical area. Usually, the maximum amount is greater near metropolitan areas. Many borrowers’ incomes still qualify for the USDA loan, especially if they are earning average wages. The maximum allowable amount also increases for each additional family member.

USDA loans enforce geographical restrictions on the homes they insure. Since they are rural loans, the homes they insure must exist in approved rural areas of the U.S. as defined by USDA. These areas include open country land that is traditionally considered “rural” as well as suburbs and small towns with populations less than 30,000. The USDA’s website features a comprehensive map that will reveal whether or not a particular address is USDA-eligible. Homes residing in eligible areas may be existing, foreclosed, or newly constructed. The only other restriction is that the home must be intended to be the buyer’s primary residence.

Despite being one of the newer mortgage programs on the market, USDA loans are quickly becoming a favorite among eligible borrowers. The zero required down payment coupled with affordable rates make USDA loans competitively affordable. Lenient approval standards also make dreams of homeownership a reality for many borrowers who weren’t eligible for mortgages before.