When people hear the acronym USDA (U.S. Department of Agriculture), they probably think about crops and cows and such. But this entity actually offers quite a unique mortgage loan for those who qualify.
A USDA loan requires zero down payment, extremely competitive interest rates (sometimes lower than FHA and conventional loans), relaxed credit requirements and reduced mortgage insurance premiums.
“I’m wholly convinced that these loans are fantastic for the right borrower,” says Jesse Gonzalez, president and broker of record at North Bay Capital, Inc., in Santa Rosa, Calif. “One word of caution, since you’ll be financed to 100 percent loan to value, there is some risk to the borrower that they will be underwater should the market turn. It’s best to use this loan as a long-term solution.”
USDA mortgages can be made for homes in rural areas. But there are plenty of suburban areas that are part of the program, too. To see if the area you want to move to is part of the eligible area, go to USDA’s Property Eligibility page. You might be surprised how many well-populated areas are eligible.
Even if you do find a home within the boundaries of eligibility, you also have to be within the income limits. Those limits do differ in the higher-cost-of-living areas such as California, Gonzalez says.
Here are two success stories of people acquiring USDA home loans to buy their dream houses:
Buying a short sale with a USDA loan
One of Gonzalez’ clients made plenty of money to qualify for a mortgage, but for specific reasons, he had no down payment to buy a home.
“So it made sense to look into USDA loans,” Gonzalez says. “Many times, the borrower will receive a larger credit from the lender which can be used to pay for other closing costs. My borrower’s credit was actually so large that he received cash back at closing. His initial earnest money deposit was greater than his actual costs, so he received some of it back.”
His client got a 3.875 percent interest rate for 30 years buying a short sale home. He pays less than $1,300 a month in principal and interest. The mortgage insurance premium is only $66.25 a month. USDA loans changed its mortgage insurance rates recently to 2 percent of the loan amount upfront which can be financed into loan, and a .50 percent annual fee, paid monthly.
These fees are, in the long run, less than those of FHA, which requires 1.75 percent upfront and .85% yearly.
Gonzalez’s client was able to buy a four-bedroom, two-bathroom home built in 2002 with 1,660 square feet.
USDA loan allows couple to build equity fast
Daniel and Samantha Horning from Boulder City, Nev., started shopping for a home in January 2011.
“We had one daughter at the time and were expecting our second. The 900 square foot – with only a three-fourths bath – rental home was starting to feel crammed,” Daniel says. “Rent in anything bigger was hundreds of dollars more expensive than a mortgage would be on the same size 3- or 4-bedroom house.”
Rent was about $1,300 for a three bedroom at that time versus $800-$900 a month for a $150,000 mortgage to buy a three-bedroom house.
“The only problem was the down payment. Our real estate agent had heard something about the no-down payment USDA loan and suggested we talk to our loan officer about it,” he says.
The couple gathered their necessary loan documents and were approved. They closed on their first home at the end of June 2011 – which was a few days before the USDA loan changed to include mortgage insurance, he says.
“The story gets better,” Daniel says. “Because we were able to buy when we did, the value of our house has since improved thanks both to time and improvements we’ve made to the kitchen and living room.”
The value increase was enough to pay for a home addition, increasing the house from three bedrooms and 1,050 square feet to four bedrooms and 1,440 square feet.
“Now with three children, a dog and a cat, we fit comfortably in the home that we couldn’t have gotten into three years ago or expanded had it not been for the USDA loan,” he says.
USDA loans: zero down and affordable payments
The USDA loan offers perhaps the best deal for new home buyers on a tight budget. Even those who never thought they could buy a home are doing it with a USDA loan.