If you’re in the market for buying a home, you’ve probably been researching your loan options. While there is a lot of information available for conventional loans, as well as specialized programs like FHA, one often overlooked loan program is the USDA Rural Development loan.
Before you click away because you’re not planning on buying farmland, hang on for just a second. What most people don’t realize is that many homes in suburban areas could very well be eligible for the USDA program, and therefore, you could be missing out on potential perks.
Take a look at some of the key aspects of the USDA Rural Development Loan, and find out if you (and the property you’re interested in) qualify…
What is a USDA Home Loan?
The USDA Rural Development loan was established in 1949, and designed to help people become homeowners in rural areas. The key selling point is that the loans allow for a zero down payment. In addition, monthly mortgage insurance fees are lower than other programs including FHA, so that could mean a lower payment. Finally, with less stringent credit requirements, it’s not necessary to have high credit scores in order to qualify. In short, it’s a great deal.
The reason you might not have heard of it is that it only applies to properties that are located in USDA-eligible areas of the country. So not only does the home buyer have to qualify for the loan, but so does the property. That being said, because the eligibility maps are still based on population stats from the 2000 census, “rural” could include an area that’s now a thriving suburban community. Note, however, that mapping will change after October 31, 2014, since that’s when the 2010 census figures will be applied. To see if a property/area you’re interested in pursuing qualifies, check the USDA website’s map.
How to Qualify for a USDA Loan
The USDA loan only has a 30-year fixed option, and interest rates are on par with what you’ll find via other programs including FHA and VA. (USDA home loan interest rates are actually lower than conventional loan rates.) Once you check to see if a potential property qualifies, next you have to see if you’ll be eligible as a borrower. Because it is backed by the USDA, there are some income limits involved. Essentially, for the Guaranteed loan program – the option offered by banks and mortgage companies across the country – your household income can be no greater than 115 percent of the median household income for the area in which the property is located. You also cannot have too many assets (enough to make a substantial down payment that’s required for a conventional loan).
If you meet the income and asset requirements, you’ll have to work with a USDA-approved lender to begin the application process. Most lenders today are approved to take USDA loan applications. Credit-wise, lenders need a 620 credit score, but there could be some flexibility depending on other circumstances and each lender’s specific criteria.
For those with a low household income, there is the option to apply for a Direct USDA loan, which is available from USDA itself rather than through private lenders. To qualify, you must earn 80 percent or less than the area’s median income.
Why a USDA Loan is a Great Deal
It’s mentioned above, but it bears repeating: USDA loans require no money down. That is practically unheard of in today’s home buying market (other than VA loans, which are reserved for military affiliated buyers). Not having to save up for a large down payment removes one of the biggest obstacles for becoming a homeowner. If nothing else, that benefit can help fast track your route to home ownership.
As for fees, you will be responsible for a mortgage insurance premium, as well as an annual fee. The insurance premium is 2 percent of the total loan, which you can pay up front, have the seller pay if that’s part of your agreement, or roll into your monthly payments. The annual fee is .50 percent (increased from .40% as of October 1, 2014) of the loan amount, and can be added into your monthly costs as well. These fees are lower than the typical private mortgage insurance payments that borrowers have to tack onto any loans that are taken with less than 20 percent down.
Overall, USDA Loans are a terrific option for buyers who happen to be looking in or around approved property areas. If you think that you might meet income and other qualifications, it pays to do some research and find a USDA-approved lender who can answer your questions and get you started on the application.
Apply for a USDA Home Loan
The application process for a USDA loan is just like that of other loan types. Many home buyers can receive a pre-qualification in just minutes. Check today’s USDA rates here and get started on your home buying process.