When considering what type of mortgage to purchase a home, USDA mortgages are one of the top choices for those living in rural areas.
USDA loans are backed by the U.S. Department of Agriculture and are designed to help people living in low-to-moderate income households buy a home in a rural or even suburban location.
Let’s explore some of the pros and some potential downsides of a USDA loan to help you determine if this loan type is a good fit for your financing needs.
Why people choose USDA loans
USDA loans come with their fair share of benefits, including the potential for 100% financing. With this loan type, homebuyers can opt for a no down payment loan which is ideal for those struggling to save up for a hefty down payment.
Other benefits include the fact that no cash reserves are required to qualify, there are more lenient credit qualification guidelines, low-interest rates, and no prepayment penalties.
Buyers using USDA loans can also finance repairs and closing costs into the loan, or get help with closing costs from the seller.
The downsides of a USDA loan
So, why don’t more people use USDA loans? Like any mortgage type, there are downsides to be aware of as well.
The main downside that stops people from taking out USDA loans is the geographic restrictions. As USDA loans are only designed for rural areas mostly, it means that anyone who wants to buy a home in a more urban location cannot qualify.
As USDA loans are only for those on low-to-moderate incomes, there are income limits in place. This means that if you have a higher income, you will not qualify for a USDA loan.
This is not a set figure as income fluctuates greatly across the country. Instead, it’s measured against the median income of the area. The maximum acceptable income is set at 115% of the median income for the area.
Mortgage insurance applies
Like many government-backed loan programs, USDA loans usually require you to take out mortgage insurance. This is required if you have no or a low down payment as it helps to protect the lender from the increased risk of the borrower.
With USDA loans, you need to pay an annual mortgage insurance premium the entire time you have the loan. There’s an upfront fee of 1% of the loan and a 0.35% annual fee. However, mortgage insurance premiums for USDA loans are often much more affordable when compared to other loan programs such as FHA loans.
While the mortgage insurance can be rolled into your loan amount to avoid lump sum payments, it increases your monthly costs.
How long do you have to wait to refinance a USDA loan? The USDA loan program requires that you wait at least 12 months before refinancing, which is worth bearing in mind if you wish to eventually refinance your loan.
As well as location, the property you wish to purchase must meet the USDA’s property requirements. USDA loans can only be used to purchase a primary residence and cannot be used for second homes or investment properties.
All properties must also meet the HUD’s minimum safety standards which means it needs to be appraised to ensure it meets all the requirements. This can delay the process if issues are found during the appraisal.
While USDA loans are a great option for low-to-moderate income families buying in rural areas, it’s important to be aware of the downsides and look into other home loan programs to make the best decision for you.
For help with making your decision and applying for your home loan, get in touch with OVM Financial today.