United States Department of Agriculture (USDA) mortgage loans offer several excellent benefits, like many other federal home loan programs. While these benefits are great for almost anyone, they are especially useful in helping first-time home buyers get approval for a mortgage. Due to relaxed down payment requirements and low interest rates, as well as flexible credit standards offered by the USDA, it may be a great way for home buyers to obtain a mortgage loan.
Let’s take a look at some of the benefits of USDA mortgage loans, and how they may be advantageous for people who wish to look for housing in rural areas or outside of major metropolitan areas.
What Is a USDA Loan?
A USDA loan is a federal loan program that is offered in conjunction with the United States Department of Agriculture. The loan is intended to help home buyers in rural areas of the United States.
What is a rural area? The USDA defines a rural area as an area with a population less than 20,000. While this is not a set-in-stone requirement, and there are additional stipulations that can increase that number up to 35,000, it can generally be stated that if a property is outside of a major metropolitan area, and the population of the city or town is less than 20,000, it may be worthwhile to consider applying for a USDA loan.
What Are the Benefits of a USDA Loan?
There are numerous benefits of a USDA loan, making it a fantastic option for home buyers in rural areas. Here are some of the most commonly cited benefits of a USDA mortgage loan:
No Down Payment
Much like the Veterans Affairs (VA) loan, another federal loan program, a USDA mortgage loan has no down payment requirement. This means you may take out a mortgage for up to 100% of the home’s value, which is actually better than the popular FHA (Federal Housing Administration) loan program, because an FHA loan requires a minimum down payment of 3.5% of the total value of the home.
Additionally, because a VA loan requires you to be a current or former member of the United States Military, the USDA loan program is the only federal loan program in America to offer a 0% down payment option if you are a civilian who has never served in the Armed Forces.
Relaxed Credit Requirements
Much like its sister federal loan programs, the USDA loan offers credit requirements that are more relaxed than conventional mortgage loans. Although it generally still requires you to have a credit score of 640 or higher, it is possible to obtain a USDA loan if your score is under that number. This is possible via what is known as manual underwriting, during which someone manually determines your loan eligibility based on income, home value, and other factors, rather than by using a computerized calculation.
Excellent Chances of Eligibility Based on the Home’s Location
More than 97% of all land in the United States falls under what the USDA defines as a rural area, which is classified as an area in which over 100 million Americans reside. That means just about one in three Americans may live in an area that the USDA defines as rural.
Lower Upfront Fees
Many federal loan programs require that the buyer pay an upfront fee. These fees have various names, but are typically expressed as a percentage of the loan amount. In the case of FHA loans, it is 1.75%, whereas a USDA loan only requires a fee of 1%. The VA loan varies between 1.4% and 2.3%.
No Mortgage Insurance
Mortgage insurance is a requirement of many federal and conventional loan programs, as it is the insurance included as part of the mortgage payment. This insurance is paid to a third party that will reimburse the lender should the borrower stop making their mortgage payments and default on the loan.
Like the mandatory upfront fees, the mortgage insurance fees are expressed as a percentage of the loan amount; rather than paid as a lump sum, they are paid monthly. With a USDA loan, there is no mortgage insurance requirement, although there is an annual USDA loan fee that is 0.35% of the loan amount. While that may sound like a lot, it is significantly less than the 0.45%-to-1.05% fee that comes with an FHA loan.
USDA rural home loans can be an excellent option for home buyers looking to live outside of large cities or metropolitan areas. For information on additional requirements, check out our recent article on USDA income limits.
At OVM Financial, our dedicated team of loan officers are happy to answer any questions that you may have regarding the various loan programs available, and we are committed to assisting you in any way we can to make your dream of homeownership a reality.