Welcome to step 1 of our 4 part guide on how to get a USDA home loan. You’d be surprised how many people don’t know about the benefits of a mortgage that offers 100% financing. That’s right, no down payment! But, is there a catch?
What are USDA Loans?
USDA loans, sometimes referred to as a USDA rural development loans, are backed by the United States Department of Agriculture (USDA). They are part of the department’s Single Family Housing Guaranteed Loan Program. USDA loans are designed to help first-time home buyers in lower-income areas. The objective is to help more people achieve the American dream of homeownership while also sparking economic growth and development in these smaller real estate markets.
USDA home loans are available to home buyers who have low-to-average income compared to their area. They are also designated for areas deemed “rural” by the government, so not all counties or zip codes will be eligible for a USDA home loan. As we get further into this guide series, we will provide detailed information on all buyer and property requirements that you need to understand.
Advantages of USDA Loans
For qualifying borrowers, there are many benefits to USDA loans.
What is the Down Payment for a USDA Loan?
USDA loans allow for up to 100% financing. This makes them different than other loan programs designed to help first-time home buyers and low-income borrowers. VA Loans can offer 100% financing in some cases, but they are reserved only for military veterans, active service members and surviving spouses. FHA loans are also for first-time home buyers. However, they will generally require a down payment of at least 3.5% of the home’s value. USDA loans can be secured and the borrower won’t be required to pay any down payment on the property.
What are the USDA Loan Rates?
USDA loans also allow for better mortgage interest rates. The rates are typically below market averages for conventional loans and often lower than what you can get with an FHA or VA loan. Lower interest rates mean lower monthly mortgage payments, as well as more of your payments going toward the principal value of the loan. Over the course of the entire loan, you end up paying less on interest and this saves you a lot of money!
What About Mortgage Insurance with USDA Loans?
Conventional home loans and other loan programs will require you to pay private mortgage insurance (PMI) until you have paid off at least 20% of the home’s value. Depending on the size and type of the loan, the average cost of mortgage insurance is 0.58% – 1.86% of the original loan amount per year. That adds up to $580 to $1,860 for every $100,000 of the loan per year until you have reached the 20% threshold. PMI premiums are collected as part of your monthly mortgage payments and the fees are non-refundable. This is extra money you never get back. USDA loans will still require PMI, but the premiums are much lower-than-average compared to other loan programs.
This is just part 1 of our guide on USDA Loans. If you are looking to buy a home in a rural area, contact us today to check your eligibility and to get started on your mortgage application.