Call (855) 923-5041 if you have questions about the USDA Loan
As you begin to research mortgages, you'll notice that you have many
choices above and beyond traditional conventional financing. Many government programs are designed to assist people in varying degrees of
financial health to attain home ownership status.
You have FHA loans run by the Federal Housing Administration, VA loans run by the Veteran's Administration, and USDA loans run by the United States Department of Agriculture. Out of all the loan programs available, that last one, the USDA loan, is probably the least well known.
Too often, people dismiss that as an option because they assume it's not for them. Maybe they don't want to live on a farm. Perhaps their definition of 'rural' equates to out in the middle of nowhere. If that's the case, don't be so quick to dismiss this option! If you are interested in owning a home outside of a major metropolitan area, a USDA mortgage may offer you some advantages you weren't aware of.
How Does a USDA Loan Work
You probably know a little about the United States Department of Agriculture already. They have something to do with the food pyramid, right? In actuality, they do much more than that. The USDA was founded under Abraham Lincoln back in 1862. Their mission is to provide economic opportunity and help rural America to thrive. They work under many
different umbrellas, including Farm Production, Food and Nutrition, Food Safety and more. They also have an agency called Rural Development, which offers home loans and loan guarantees to eligible applicants, also known as a USDA loan. The purpose of a USDA loan is to extend the opportunity of home ownership to moderate-to-low income families by encouraging them to settle down in rural and suburban areas of the country. Not only does this benefit you, but it also gives a boost to rural neighborhoods who may otherwise struggle with economic growth.
USDA Loan Benefits
You may wonder how insuring a loan to the lender benefits you. When
the government promises a lender they won't lose money on your
transaction, it is much easier to qualify for financing. If you don't
have a ton of savings and are interested in living outside the city,
there are some huge benefits of choosing a USDA loan over conventional
No Down Payment Requirement
The USDA allows you to finance 100% of your home value. This reason is by far the deciding factor for most people to apply for this type of loan. It can take someone years and years to save up for a down payment on a mortgage. A USDA home loan gets you into a house much more quickly. You can start making payments toward owning your own home instead of handing your hard-earned money over to a landlord. Unless you are a US Veteran and qualify for a VA loan, this is the only type of mortgage that allows you to buy a house with no money down. Even an FHA loan requires a down payment of at least 3.5%, which means you still need a minimum of $5,250 cash available if your house costs $150,000. It's always a good idea to have cash on hand before you buy because moving always costs money. But a USDA loan allows you to save your money for these expenses instead of putting it into the house upfront.
Low Interest Rates
Loans that are insured by the US Department of Agriculture all have the same low fixed interest rate. As long as you have a credit score of at least 640 and a debt-to-income ratio of no more than 41%, you will qualify (assuming you do not exceed income limits). Even if you are approved for conventional financing, the chances are good that you'd need a 20% down payment to qualify for an interest rate equal to a USDA loan.
Relaxed Credit Guidelines
The act of verifying your creditworthiness is known in banking terms as underwriting. When banks underwrite a loan, they confirm you've demonstrated that you are fiscally responsible enough to handle a large loan, such as a mortgage. The two things lenders look for in applicants seeking a USDA loan are their credit score and debt-to-income ratio, or DTI.
Your credit score, also known as a FICO score, is calculated by the Fair Isaac Corporation. FICO monitors your financial
history, including your payment history, total debt load, and other factors. It converts this information into a three-digit number. As stated above, if you have a credit score of at least 640 (which is considered fair credit), you are eligible for a USDA loan.
The ratio of monthly debt payments compared to your gross monthly income makes up your debt-to-income ratio. Examples of debts are car payments, student loans, personal loans, credit cards, and mortgage. It does not include expenses such as food, gas, and utilities. If your monthly debt payments do not exceed 41% of your gross monthly income (i.e., your income before taxes), you're good to go!
Finance Upfront Mortgage Insurance Fee
In addition to your monthly mortgage insurance payment, there is a one-time upfront mortgage insurance fee in the amount of 1% of the loan value. With a USDA loan, you can roll this fee into your mortgage, saving you from the need to have cash upfront to pay for it. This rule holds even if you are financing 100% of your home's value. If you are asking for a $200,000 loan, your upfront mortgage insurance fee amounts to $2,000. If you choose to roll that into your loan, your loan balance becomes $202,000. Many people choose to do this. Just be aware that it means you are financing more than your home his worth.
You may wonder how insuring a loan to the lender benefits you. When the government promises a lender they won't lose money on your transaction, it is much easier to qualify for financing. If you don't have a ton of savings and are interested in living outside the city, there are some huge benefits of choosing a USDA loan over conventional financing.
Lower Monthly Mortgage Insurance
Even though the USDA insures your mortgage, you are still required to pay a type of private mortgage insurance, also known as PMI. Anytime you put down less than 20% cash on a mortgage, PMI is a certainty. You'll find this across the board with all types of mortgages. The good news is that PMI's cost on a USDA loan is meager compared to other mortgages, costing only 0.35% of the loan value annually. For comparison purposes, see the chart below:
Loan Value of $200,000
Estimated Cost Per Month
0.5% - 1.0%
$83 - $166
USDA Loan Guidelines Overview
As you can see, there are some significant advantages to utilizing a USDA loan. However, there are some guidelines to keep in mind if you decide to pursue this financing option.
This guideline is the biggest hurdle for some, and there is no way to get around it. Because the USDA loan program exists for low-to-moderate-income families, you need to meet specific income limits to qualify. The government determines your income eligibility based on the size of your household and where you live. A family of between 1 and 4 people is not allowed to exceed the median household income of any geographic location by more than 15%. If your household is comprised of more than four people, that percentage goes up accordingly. To see if you meet the income requirements for the area you're looking to purchase, check out the USDA's comprehensive calculator.
From earlier in this article, you may remember that USDA loans fall under the Rural Development agency's umbrella. You can only finance a home under this program if it falls within an eligible geographic location. Are you wondering about the definition of rural? Never fear, there is good news on that front! 97% of the United States is considered eligible for USDA approved financing. You won't be able to buy a home in downtown Los Angeles, but there are suburbs outside the city that would be eligible. You can look on this map created by the USDA to see if the address your considering is eligible for USDA financing.
A USDA mortgage allows you to buy a house with no money down, a low interest rate, and affordable mortgage insurance. It brings the benefits of home ownership within reach for many who would not otherwise afford it. Our loan specialists at Community First National Bank have all the information you need, and they are waiting to see if a USDA loan is right for you. Call now (855) 923-5041.
6505 N. Prospect Ave. Ste. 400 Gladstone, MO 64119
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