Are you looking for a 0% down payment loan option? USDA mortgage programs might be a good fit for you. Guaranteed USDA loans and USDA direct loans are both available to buyers with credit scores of at least 640 who are looking for properties in smaller towns and rural areas.
In this post, we’re going to focus on guaranteed USDA loans. We’ll explain what a guaranteed USDA loan is, how it differs from a USDA direct loan, and what the pros and cons are.
By the end of this post, you’ll know if a guaranteed USDA loan is the right fit for you.
What is a Guaranteed USDA Loan?
A guaranteed USDA loan is a loan backed by the United States Department of Agriculture. This means that the USDA assures your lender that you will repay the loan. If you default, the USDA will make sure the lender recoups their investment.
Why would the USDA do this for homebuyers? Well, the USDA wants to promote agricultural areas and incentivize buyers to consider more rural areas rather than over-populated urban areas. So they offer this special loan type specifically for approved regional areas, which include rural areas, as well as small-to-medium-sized towns, and even some suburbs.
How is This Different from a USDA Direct Loan?
At this point you might be wondering, what is the difference between USDA direct and guaranteed loans?
The main difference is the source of the funding for the loan. With a guaranteed loan, a third-party lender loans the money, and the USDA simply insures the borrower. But with a USDA direct loan, the USDA is the lender, providing the funds directly to the borrower.
USDA direct loans are reserved for buyers with very low to low incomes. To qualify, your income needs to fall within a range of 50-80 percent of the local average income. Guaranteed USDA loans, on the other hand, allow borrowers to make as much as 115 percent of the local average.
USDA direct loans also restrict the size of the property to 2,000 square feet and require that the property not have an in-ground pool or any income-producing features. There is no such restriction for guaranteed USDA loans.
Pros and Cons of a Guaranteed USDA Loan
There are several benefits of guaranteed USDA loans:
- Qualified buyers can get a 0% down payment. This makes homeownership accessible to buyers without a huge savings account.
- Interest rates are competitive. You’ll pay rates comparable to conventional mortgage loans.
- You can roll closing costs and renovation costs into the loan. No need to pay these costs out of pocket.
- The seller is allowed to pay your closing costs. This is helpful in a buyer’s market when sellers need to offer additional incentives to close the deal.
- There is no pre-payment penalty. You can choose to pay off your mortgage early to reduce your overall interest expense.
- Assumability. If you’re wondering are USDA rural development loans assumable? The answer is absolutely! This allows you to transfer your mortgage terms to qualified buyers in the future, which can give your listing an impressive advantage if interest rates are higher when you sell than they are when you buy.
There are also a few potential downsides to guaranteed USDA loans:
- Urban locations don’t qualify. This program only applies to pre-determined areas with lower population density.
- You can only purchase a primary residence, and it can only have one unit. No income properties or second homes are allowed.
- Your income must fall within the acceptable range. If you make more than 115% of the local average, you can’t get a USDA loan.
- If you put less than 20% down, you will have to pay mortgage insurance premiums. There’s an upfront fee of 1% of the loan amount plus annual fees of .35% of the loan balance. However, the mortgage insurance premiums for a USDA loan are often cheaper than comparable loan programs.
Do You Have Questions About Loan Options?
The experts here at OVM Financial are always happy to discuss loan options for your unique financial circumstances. Call us today at 757-296-2148 for a friendly, no-obligation consultation. Or, if you’re ready to apply for a mortgage, you can start the process online at www.ovmfinancial.com/QuickStart.