The USDA mortgage program is a great option as a 100% home loan for many lower income Americans in rural areas, but as with any mortgage loan, it has its pro’s and con’s. Below is more information about the USDA home loan program with zero down payment required. There is very few no down-payment loans today, so getting educated on the USDA option may be worth your time.
Overview of 100% Loan Backed by the USDA
The USDA home loan program allows people with fewer financial resources to buy homes in rural parts of the country with little or no down payment. There are two types of USDA 100% home financing for rural properties:
- The Guaranteed Loan Program
- The Direct Loan Program
The guaranteed loan program is the most common type. It allows the qualified borrower to obtain a mortgage from various USDA approved lenders, such as mortgage brokers, credit unions and banks. With the guaranteed loan program, 90% of the loan amount is insured, so the lender is protected if you do not pay the loan back. This allows many lenders to offer you no down payment loans backed by USDA at low interest rates.
The direct loan program allows the borrower to receive a loan and even payment assistance from USDA directly. This loan program is for people with very low incomes who cannot get a mortgage through USDA approved lenders. There is no question that the USDA rural home loan program can be a great deal for many lower income Americans. But it is important to weigh the pro’s and con’s we highlight below:
Pro’s of 100% USDA Loans
First of all, you do not have to make a down payment in most cases. This is one of the biggest hurdles to buying a home for most lower income Americans. Even FHA financing is backed by the US government require a 3.5% down payment, and the lowest down payment for a conventional loan today is 3%. Because you can probably finance 100% of the purchase price, the USDA home ownership program is a great deal for many Americans. Consumers certainly benefit from the no money down mortgage.
Second, the mortgage rate on a USDA loan is usually lower than the rate for most low-down payment programs, including FHA, which itself has very low rates. The interest rate for a USDA loan is lower because the loan is backed by USDA, and borrowers must pay both up front and ongoing mortgage insurance costs. The lender is assured of getting most of its money back if you default, so the rate can be low.
Third, USDA-home loan requirements have lower mortgage insurance fees than FHA and conventional loan programs. As of the end of 2016, you are required to pay an upfront mortgage insurance fee of 1% of the mortgage amount, and the monthly fee is .35% of the loan amount. An FHA loan has a 1.75% upfront fee and a monthly fee of .8% to 1.05%. The only negative part of USDA mortgage insurance is that you are required to pay it for the life of the loan, unless you are able to refinance later. Learn about FHA loans. A conventional loan has mortgage insurance removed when your loan to value reaches 78%. Compare conventional and FHA loans.
Fourth, the USDA 100% loan program has no loan limits. Both FHA and VA loan programs have loan limits that vary depending upon the area of the country. You are limited with the USDA loan program depending upon your income, but no loan limits make the program more available to more Americans.
Con’s of 100% USDA Home Financing
First, note that the USDA loan program is a rural home loan program. The property that is being financed has to be in an area that the USDA designates as rural or small community. Most homes in the United States are located in major metropolitan areas and are ineligible. Potential borrowers can use the USDA’s property eligibility tool to see if the desired property is in the proper location. Also, the home must be a single-family home or condo that is in ‘good condition.’ Note that multifamily properties are not eligible for a USDA loan.
Second, there are strict borrower qualification requirements. Borrowers need to have a credit score of at least 620, while FHA loans require only a 580. Also, the USDA program has a debt to income ratio of 41% to determine what you can afford, while FHA uses 43% to 50%. However, USDA will allow a higher debt to income limit for borrowers who have a stronger credit score and more savings.
Third, there are borrower income limits that apply for the USDA home loan program. Borrowers who earn more than the limit cannot get an USDA loan. USDA borrower income limits are different by county and the number of people in the household. The limit for the guaranteed loan program is usually 115% of the median household income for the area where the property is located. Read more about how to apply for a USDA mortgage.
The bottom line is the USDA loan program can be an excellent value for rural home buyers who have a lower income. But there are limits to the program as far as your finances, credit and property location, so it is not for everyone.