Learn the Pros and Cons of a USDA Loan?

No down payment and the seller can pay some or all closing costs.

Couple looking at their new homeThere are many factors to consider when deciding whether to apply for a USDA loan. In this article, we'll outline some pros and cons of these loans so that you can make an informed decision.

Single-Family Housing Direct Home Loan

The Single-Family Housing Direct Home Loan, also known as the USDA loan, is a great loan option for those looking to buy a home with little to no money down.

The US Department of Agriculture (USDA) backs the mortgage loan, which is available for first-time buyers and repeat buyers.

The main benefit of this loan is that it does not require a down payment, making it an affordable option for those with limited funds.

Additionally, the interest rate on this loan is typically lower than the rates for other types of loans, such as conventional loans.

The loan term is either 33 or 38 years. A longer loan term lowers the monthly loan payment. The interest rate can get down to 1% for the income-challenged borrower. Read more

Section 502 Guaranteed Rural Housing LoanBeautiful kitchen

The United States Department of Agriculture (USDA) offers a loan program known as the Section 502 Guaranteed Rural Housing Loan.

This program aims to assist low- and moderate-income households purchase homes in rural areas.

USDA loans are only available for a 30-year. The interest rates on USDA loans are typically lower than the rates on other types of loans, such as conventional mortgages. This makes USDA loans a good option for families who are looking to purchase a home in a rural area.

The government guarantees the USDA loan program, which means that there is less risk associated with the loans for lenders.

This makes it easier for families to qualify for a USDA loan.

Overall, USDA loans are a good option for families who are looking to purchase a home in a rural area. They offer low-interest rates and are backed by the government.
Read more about Guaranteed Rural Housing Loan

Closing Costs Can Be Rolled Into the Loan With a High Appraisal

If you're considering a USDA loan to purchase a home, you may be wondering if it's a good idea. USDA loans can be a great option for borrowers who are looking to finance a home in a rural area with no down payment. Additionally, closing costs can be rolled into the loan if the appraised value of the home is high enough.

Cosigners Are Allowed on a USDA Loan

Sometimes it's impossible to get a mortgage approved. It can mean that you will need a cosigner. Someone who cosigns your loan assumes responsibility for the mortgage should you cease making payments. That's a significant duty. Each loan, including the USDA loan, has certain rules regarding cosigners. Read more about USDA cosigners

Flexible Credit and Qualifying Guidelines

Young family with the kidsThe USDA does not have a strict credit score requirement, applicants with low scores may still be able to get a home loan that is supported by the USDA.

Approved USDA lenders offer the Section 502 Guaranteed Rural Housing Loan Program, a federal program administered by the USDA.

Approved USDA lenders normally need a minimum credit score of at least 640. A USDA-backed mortgage may still be available to borrowers with credit scores below 640 as the USDA does not have a minimum requirement.

Application for the Direct loan is made directly to the USDA. There is no established credit score requirement for the Direct loan program, but the USDA prefers a 640 credit score. An applicant whose credit score is lower than 640 is subject to the manual underwriting process.
Read more about credit requirements

Gift Funds Are Allowed

If you're thinking of taking out a USDA loan, you'll be glad to know that gift funds are allowed. This means that if you have a family member or friend who's willing to help you with the down payment, they can do so without any problems. The same goes for grants, provided the money is given to you as a gift, it can be used towards your USDA loan.
Read more

Good for Purchase or Refinance

The United States Department of Agriculture (USDA) offers a variety of loan programs to help low- and moderate-income individuals finance the purchase or refinance of a home. The USDA’s Single-Family Housing Programs provide mortgage loans to rural homeowners with low incomes. The programs are designed to help improve the economy and quality of life in rural areas.

The USDA offers two purchase programs:

Section 502 Guaranteed Rural Housing Loan

Single-Family Housing Direct Home Loan

The refinance programs include:

Streamline Assist
Streamline Refinance
Non-streamline program

504 Loan Repair program is also available for eligible homeowners.

Low Fixed Interest Rate

If you're looking for a low fixed interest rate on your home loan, then a USDA loan could be a good option for you.

USDA-backed loans are offered by the US Department of Agriculture, and their rates are competitive and their terms are favorable.

Plus, there's no down payment required, which could make it easier to qualify for a loan.

Reduced Mortgage Insurance Premiums

If you're looking for a government-backed mortgage with low down payment requirements, a USDA loan could be a good option for you. In addition, USDA loans come with reduced mortgage insurance premiums, which can help keep your monthly payments more affordable.
Read more


Cash Reserves Are Not Required

For many homebuyers, the biggest obstacle to homeownership is coming up with enough money to cover the prepaid costs. Requiring extra money for payment reserves can be a deal killer.

Fortunately, the USDA does not require borrowers to have extra funds available at settlement.

No Down Payment Required (100% Financing)

100% financing loans are available through the United States Department of Agriculture (USDA) for eligible home buyers. No down payment is required, which can make buying a home more affordable for some people.

There are some income and credit requirements that borrowers must meet in order to be eligible for a USDA loan. Borrowers must have a steady income and good credit history in order to qualify.

Overall, USDA loans can be a good option for eligible home buyers who need help with financing. The 100% financing can make buying a home more affordable, and the fixed interest rate can provide peace of mind by knowing what your monthly payments will be.

No Pre-Payment Penalty

One of the great things about USDA loans is that there is no pre-payment penalty. This means that you can pay off your loan early without having to pay a fee. This is a great option for those who may want to sell their home or refinance in the future.

Seller Can Pay Closing Costs

Closing costsIf you're looking to buy a home and are considering using a USDA loan, you may be wondering if the seller can pay your closing costs. The good news is that they can!

This can be a huge benefit, especially if you're a first-time homebuyer. Having the seller pay your closing costs can help you save money and keep your budget in check.

However, there are a few things to keep in mind. First, the seller can only pay up to 6% of the purchase price of the home. So, if you're looking at a home that's $100,000, the most the seller could contribute towards your closing costs would be $6,000.

Second, the seller can only pay certain types of closing costs. Some of the eligible costs include:

  • Appraisal fees

  • Attorney's fees

  • Credit report fees

  • Discount points

  • Lender's title insurance policy

  • Origination fees

  • Recording fees.

  • Survey fees

  • Title insurance

  • Transfer tax

If you're not sure what type of closing costs you'll have to pay, it's a good idea to speak with your lender.

The seller concession must be written into the sales contract. The seller's assistance is subtracted from the proceeds of the sale. Read more

You Can Build a Home With the USDA Loan

A USDA construction loan combines three loans into one by paying for the land, the building of your house, and your long-term mortgage. Additionally, there is just one set of closing expenses, and no down payment is necessary. Read more

The Downside of USDA Home Loans

Area Restrictions

One downside of USDA loans is that they come with area restrictions. In order to qualify for a USDA loan, the property must be located in a designated rural area. This can make it difficult to find eligible properties, especially if you're looking in a more populated area.

If you're considering a USDA loan for your next home purchase, be sure to check the eligibility requirements carefully to ensure that the property is located in an eligible area. Area eligibility lookup

Income Limits

Another possible drawback to USDA loans is USDA loans have income limits, which means that if your income is too high, you won't be eligible for a USDA home loan. USDA income limit

Single Family, Owner Occupied Only – No Duplex Homes

USDA loans are only available for single-family, owner-occupied homes. That means you can't use them to buy a duplex, second home or investment property. They're also only available in certain rural areas. If you're not sure if your area qualifies, you can check the USDA website.

Rotating question markFrequently Asked Questions

Q. Are USDA loans hard to get?
A. No, USDA loans are not hard to get. In fact, they are one of the easier types of loans to obtain. The main requirement for a USDA loan is that the property be located in a rural area.

Q. Can I refinance a USDA loan?
A. The USDA offers three great refinance ptograms. The Streamline Assist program does not require an appraisal or employment.

Q. Can the USDA loans be used for manufactured homes?
A. Yes, USDA loans can be used for manufactured homes. The home must be on a permanent foundation and meet other requirements, but the loan can be used to purchase the home, finance upgrades, and cover other costs associated with the home. Read more

Q. Can USDA loans be used to build a house?
A. Yes, USDA loans can be used to build a house. The USDA Rural Development program offers home loans with no down payment and low interest rates to rural and suburban homeowners. To be eligible for a USDA loan, your home must be located in an area that is designated as rural by the USDA. Read more

Q. Do USDA loans have pmi?
A. Yes, USDA loans do have PMI. This is a requirement of the program in order to protect the lender in case of default.

Read more about USDA loans with our questions and answers page

Conclusion

There is no easy answer when it comes to whether or not USDA loans are good for you. On one hand, they offer low-interest rates and flexible guidelines, making them an attractive option for many home buyers. However, the lack of understanding about these loans can lead to confusion and frustration. It is important to do your research and work with a qualified loan officer to determine if a USDA loan is the right fit for you.