Buying a home can be a very stressful and challenging process. In today’s market, there are only a handful of different loan products compared to the hundreds that were available before the housing downturn in 2008. Other than the VA Home Loan, the Rural Home Loan is the only 100% no money down product available. Since a person must be a veteran to qualify for the VA Loan this eliminates most from being eligible for this loan. The USDA Rural Home Loan was designed for borrowers in rural areas who earn low to moderate income.
The Rural Home Loan has many benefits. The first and probably most notable of the benefits is the down payment requirement. As mentioned, this loan product does not require the borrower to put any money down. There is no rule against someone obtaining a USDA Loan and putting money down, but the majority of people do not. From a pure financial standpoint many of the experts make the argument that if rates were high like they were in the 1980’s it would be logical to put more money down because it’s that much less you pay in interest. With that being said, mortgage rates have been historically low for the last several years so the logic now is that since borrowing money is so cheap it makes sense not to pay up any more than is necessary. Borrowers can keep their money and invest it and get a greater return than what they are paying in interest. The other conclusion is if the money is tied up in the home, people don’t have immediate access to it in cases of emergency. In addition to getting the money when it’s in home equity form, there is typically a cost associated.
Another benefit of the Rural Home Loan is the monthly mortgage insurance. Anytime someone buys a home and doesn’t have the money to put 20% down or if due to credit reasons they only qualify for one of the government backed loans they will have monthly mortgae insurance. Comparatively speaking, the Rural Home Loan has a much lower factor than its government backed counterpart, the FHA Loan. The FHA Loan has a monthly factor of .85%. For FHA this is a drop from the previous 1.35% which changed beginning in 2015. The USDA Rural Loan has a factor of .50%. This represents a considerable savings over the life of the loan. Both government backed loans never lose the monthly mortgage insurance regardless of the equity position. The larger the loan the more the monthly MI. The other loan type with monthly mortgage insurance is the conventional loan. While the government backed loans have a flat rate for the most part (FHA has a couple of variations) the conventional loan determines mortgage insurance based on credit score, loan amount, property location, and loan to value. The Rural Home Loan is arguably the most attractive of the three loan types.
The USDA Rural Home Loan is has flexible credit standards. There is not a minimum credit score enforced by USDA, but most USDA guaranteed lenders have their credit standards. This is often referred to in lending as an overlay. A typical score that is required is a 640. USDA Loans also disregard a lot of the derogatory items on one’s credit report. For example medical collections are not considered. Many other derogatory things are overlooked as well. The requirement for borrowers with a previous bankruptcy is 3 years removed from discharge on a chapter 7 or 3 years removed from the file date on a chapter 13. There are even times when an exception can be granted after 2 years removed. The rule when it comes to foreclosure, short sale, or notice of default is 3 years. Recently a minimum tradeline requirement was implemented, however it is flexible as well. The new requirement will allow what’s considered nontraditional credit in place of traditional tradelines. This means recurring debt such as cell phone bills, electric or other utility bills, and even auto insurance can be considered as a tradeline. The borrower's debt to income usually needs to be 29/41 which means 29% of the gross monthly income can go towards the house payment and 41% of the monthly gross income can go towards the house payment and all other debt. There is even flexibility here when a borrower has other good compensating factors such as high credit scores and substantial assets.
The USDA Loan allows the seller to pay up to 6% of the sales price towards the borrowers closing costs. Usually this is more than enough to cover all the closing costs which, in turn, allows the borrower to get into a home with little to nothing out of pocket. Of all the benefits of this loan type this is probably the most attractive, at least in the initial part of the loan process because people do not have to tie up any of their own money.
The Rural Home Loan has many benefits. It is often referred to as the best loan product available. Borrowers with less than perfect credit can achieve their dream of home ownership with this loan. Additionally they can get into the home with little to no money out of pocket.<< Back to the list.
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