Potential homebuyers today have many options available to them in the way of mortgage loan programs.
One loan program that offers many benefits to potential homebuyers is the USDA Mortgage Loan. Here is some information on the USDA mortgage, including what it is, who it’s for and steps to take if interested.
What is a USDA Mortgage?
Officially referred to as the Section 502 Single Family Housing Guaranteed Loan Program, the USDA mortgage loan is a mortgage option offered to individuals or families living in rural and certain suburban areas in the United States.
Although the finance comes from lenders, the loans are guaranteed by the U.S. Department of Agriculture.
The purpose of the USDA’s loan program is to provide families with low-to-moderate income the chance to purchase home in rural areas.
USDA loans do not require the borrower to have a down payment. However, because you’re not putting 20 percent down payment, you’ll need to purchase private mortgage insurance (PMI).
Eligibility for a USDA Mortgage Loan
Although the main eligibility requirement for a USDA mortgage is low-to-moderate income, there are other requirements applicants must meet to be eligible for the loan.
- Must be a U.S. citizen
- Must have consistent income for at least two years
- No late payments on bills for last 12 months
- Appropriate income-to-debt ratio, as per lender
- Must occupy dwelling as primary residence
- Income must not be more than 115 percent of area median income.
- Must not have been suspended from participating in other federal programs
- Property must meet program eligibility
Do I Have to Live on a Farm to Get a USDA Mortgage?
Although the home you’re hoping to buy must be in an area that is considered rural, you do not have to live on a farm.
What many don’t realize is that in almost every county throughout the nation, there are parts that are deemed rural. You can live only a mile or so from a large city and still be living in an area that’s zoned rural.
If the property you wish to buy includes a lot of acreage, the property may still be eligible as long as it’s not going to be used primarily for income-producing reasons. Properties used to produce income and vacation homes cannot be purchased with a USDA mortgage.
Benefits of a USDA Mortgage Loan
Here are some of the benefits of a USDA mortgage loan.
- No Down Payment – This is probably the biggest benefit for potential home buyers. On a conventional mortgage requiring 20 percent down payment, the home buyer would need to put down $20,000 on a $100,000 home purchase. Even with a 3.5 percent down payment (FHA loans), the borrower would have to come up with $3,500.
- Interest Rates Lower Than Market Rates – Because this is a USDA-backed loan, borrowers are charged a lower-than-average interest rate, and the rate won’t fluctuate based on your down payment or credit scores.
- Less Rigid Credit Requirements – Borrowers with less-than-perfect credit can still get USDA loans. They also allow borrower to use companies like cell phone or utility companies as proof of credit or payment history.
- Lower Private Mortgage Insurance – The premiums for PMI are lower with USDA loans. Once borrowers have paid two percent of the loan amount as the initial PMI, they only have to pay 0.5 percent of the remaining balance over 12 months.
- PMI Can Be Financed Upfront – Unlike other loans that require you to pay this amount at the loan closing, USDA loans allow borrowers to add this amount into their loan.