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6 min read Jun 05, 2023

USDA Loans: A Path to Affordable Rural Homeownership

It’s natural to wonder how much money you need to save for a down payment. With home prices skyrocketing, saving up for a down payment can be a big hurdle for many homebuyers.

But can you buy a house with zero down payment? The answer is yes! You can.

Here, we’ll look at how buying a house with zero down payment works. We’ll also explore whether no or low down payment loans make sense for you.

🚀 Key Takeaways

  • Why USDA Loans are Affordable: Zero downpayment and low-interest rates make USDA loans affordable for low and moderate-income groups.
  • Types of USDA Loans: The three types of USDA loans are USDA Direct Loan, USDA Guaranteed Loan, and USDA Home Improvement Loan.
  • USDA Loans Origination Fee: You need to pay a USDA loan origination fee of about 1%.
  • Are you Eligible for USDA Loans?: To be eligible for a USDA loan, you must meet income and citizenship requirements.

What is a USDA Loan?

USDA loans are government-backed mortgages for home buyers with low incomes. They are non-conforming loans guaranteed by the USDA Rural Development Guaranteed Housing Loan Program.

USDA home loans require zero down payment. This makes them affordable for low to moderate-income home buyers. Additionally, they have lower interest rates than conventional mortgages.

Types of USDA Loans

There are three types of USDA loans:

  • Guaranteed Loans: Private lenders such as banks and mortgage companies issue these loans. The USDA guarantees these loans.
  • Direct Loans: The USDA directly issues these loans. It has lower income requirements and offers subsidized interest rates.
  • Home Improvement Loans: Homeowners can obtain these loans to make necessary repairs and improvements to their homes.

USDA Loan Requirements

To be eligible for a USDA home loan, borrowers must meet the following requirements:

  • USDA Property Eligibility: The property must be located in a designated rural area as defined by the USDA. Use USDA loan’s eligibility map to determine the property’s eligibility.
  • Income: Your household Income should be less than or equal to 115% of your area’s median income.
  • Credit score: Generally, lenders require a credit score of 640 or higher. Lenders will review your credit score, payment history, and debt-to-income ratio to assess your creditworthiness.
  • Employment: You must have a stable income and employment history. Typically, lenders require a minimum employment history of two years. However, exceptions can be made for recent graduates.
  • Debt-to-income ratio: Your debt-to-income ratio (DTI) must be 41% or less.
  • Citizenship: USDA loans are available to U.S. residents, noncitizen nationals, or permanent resident aliens.

How Much Do I Need To Pay as USDA Loan Fee?

USDA financing comes with two specific fees:

  • Guarantee Fees: Lenders pay an upfront guarantee fee, which can be passed on to borrowers. This upfront fee will not exceed 3.5% of the principal amount of the loan.
  • Annual fee: A 0.35% annual fee is charged on the loan amount. For example, a $100,000 mortgage would have a $1,000 down payment and a $350 annual payment.

Other USDA Mortgage Costs

In addition to the upfront guarantee fee, appraisal fee, and closing costs, there are a few other fees. These fees may vary depending on the lender and the specific circumstances of the loan.

  • Credit Report Fee: The credit report fee covers the cost of assessing your credit score to determine your creditworthiness.
  • Loan Origination Fee: Some lenders may charge a loan origination fee, for processing the loan application and preparing the necessary documentation.
  • Prepaid Interest: Borrowers are required to pay the accrued interest on the loan from the date of closing to the end of that month. This amount is known as prepaid interest.
  • Escrow Fees: Many USDA loans require you and the seller to start an escrow account. Escrow accounts hold funds for property taxes, homeowners insurance, and other expenses.
  • Title Fee: The title fee comprises costs of title examination and title insurance. Title examination ensures that the property’s title is clear of any liens or ownership disputes. On the other hand, title insurance protects you against any potential title defects. Here’s how much title insurance costs.

Pros And Cons of USDA Loan

Like any loan, the USDA rd has its pros and cons. Here are some of them:

Pros of USDA Loans

  • No Down Payment: USDA Loan eliminates the need for a substantial down payment. It offers 100% financing of the home’s purchase price.
  • Favorable Interest Rates: USDA guarantee lets lenders offer some of the lowest interest rates.
  • Flexible Credit Requirements: There is no minimum credit score for USDA loans. However, to use USDA’s automated underwriting system, you’ll need a score of 640 or higher.
  • No PMI Requirement: Unlike many other loan programs, USDA loans do not require private mortgage insurance. This can significantly reduce monthly payments.
  • Rural Development: USDA loans are specifically designed to promote homeownership and development in rural areas.

Cons of USDA Loans

  • Geographic Restrictions: These loans are only available in designated rural areas. This limits the options for borrowers who prefer to purchase a home in urban or suburban areas.
  • Income Limits: It has income eligibility requirements, and borrowers must meet specific income thresholds to qualify. High-income individuals may not be eligible for USDA loans.
  • Funding Availability: They operate with a limited budget that is allocated annually. Once the allocated funds are exhausted, your loan applications may not be accepted until the following fiscal year.
  • Upfront and Annual Fees: This loan requires you to pay upfront guarantee fees and annual MIPs. This increases the overall loan expenses.
  • Additional Fees and Requirements: You may also incur fees such as appraisal fees, credit report fees, and escrow account fees. This adds to your expenses.

How Do USDA Loans Compare to Conventional Loans?

USDA loans and conventional loans differ in several ways, including:

AspectUSDA LoansConventional Loans
DefinitionThe United States Department of Agriculture guarantees this loan.No govt. agencies guarantee these loans.
EligibilityLimited to rural and suburban areas as defined by the USDA.Available for properties in both urban and rural areas.
Income RestrictionsStrict income limits apply based on the location and size of the household.No specific income limits, but lenders typically consider debt-to-income ratio and employment stability.
Down PaymentGenerally requires no down payment.Down payment requirements vary from 3% to 20%.
Mortgage InsuranceRequires upfront and annual mortgage insurance premiums.Loans with less than 20% downpayment may require PMI.
Interest RatesInterest rates are usually competitive.Interest rates vary based on market conditions and borrower qualifications.
Credit ScoreGenerally requires a minimum credit score of 640 or higher.May have more flexible credit score requirements.
Borrower AssistanceMay offer USDA grants for eligible low-income borrowers.No specific borrower assistance programs.
Property RequirementsProperty must meet USDA eligibility criteria, including location, condition, and size.The property must meet lender requirements and appraisal standards.

The Bottom Line

In conclusion, USDA loans make home-buying more affordable for people living in rural areas. USDA loan rates are comparatively low with zero downpayments.

However, USDA rural housing loan is only available in designated rural areas. This limits the options for borrowers who prefer to purchase a home in urban or suburban areas.

It’s essential to compare USDA loans with other mortgage programs to determine which option is best for you.

Frequently Asked Questions

1. How to get a USDA Loan?

To obtain a USDA loan, confirm eligibility based on the property's rural location and income requirements. Gather necessary documentation such as income verification and credit history. Submit a complete and accurate application to the lender. Once approved, undergo a home appraisal and finalize the loan through signing documents and paying closing costs.

2. How does a USDA loan work?

A USDA loan works by providing affordable financing options for individuals and families in rural areas. The USDA guarantees these loans, allowing approved lenders to offer low or no down payment options and competitive interest rates. The loans can be used to purchase, refinance, or repair homes in eligible rural locations.

3. Can you refinance a USDA loan?

Yes, it is possible to refinance a USDA loan. Refinancing a USDA loan allows borrowers to replace their existing loan with a new one, usually with better terms such as a lower interest rate or a different repayment term.

4. Can I get a USDA loan, if I don't live in rural area?

Yes. USDA loans are generally believed to be reserved for rural homes only. Many suburban homes, including those in major cities and some small towns, also qualify for low-income housing programs.

Related: usda construction loan, usda one time close loan

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