Are USDA Loans Good?

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

Beautiful kitchenThe USDA home loan program is a government-backed mortgage program aimed at helping rural and suburban homeowners. USDA home loans offer 100% financing, meaning that the entire loan amount can be covered by the borrower.

USDA home loans come with a few unique benefits that other mortgage programs don’t offer. For example, USDA loans have no down payment requirement, and the mortgage insurance premiums are cheaper than with other types of loans.

USDA home loans are available to borrowers with credit scores as low as 640. This makes USDA home loans a good option for borrowers who may not qualify for other types of mortgages.

The USDA manages the USDA home loan program, which is available in all 50 states.

USDA Loans Guidelines

There is no down payment for a USDA home loan, which is made by the United States Department of Agriculture. USDA loans are available to people who meet certain income and property rules.

The USDA home loan program was created in 1991 to help increase homeownership opportunities in rural and suburban areas. The program makes it possible for low to moderate income homebuyers to purchase a home with no money down.

USDA home loans are available across the United States, however, the program is most popular in rural areas. To be eligible for a USDA loan, borrowers must meet certain income and property eligibility requirements.

Borrowers must have a stable income, be current on all mortgage payments, and have a good credit history. The property must be located in an eligible rural area and meet certain property eligibility requirements.

USDA home loans are only available for 30-year terms. The interest rates are typically lower than the rates available on conventional mortgages.

There are a few disadvantages to the USDA home loan program. One disadvantage is that the program is not available in all areas. Additionally, the property eligibility requirements can be restrictive. See USDA Income Eligibility Site

In general, the USDA home loan program is an excellent alternative for individuals interested in purchasing a home with no down payment.
Interest rates on the program are often cheaper than those on traditional mortgages.

Reduced Interest Rate

Let's start with the interest rate. USDA home loans are backed by the federal government. What does that mean? The USDA will partially reimburse lenders who are forced to take back defaulted USDA mortgages. Because of the default protection, lenders are more likely to offer lower interest rates. Usually below conventional loan interest rates.

What Programs Are Available?

There are two loan programs offered by the USDA, the Guaranteed loan program and the Section 502 Direct loan program.

The Guaranteed loan is provided by private lenders, not the United States Department of Agriculture (USDA). The USDA Section 502 direct loan is offered through one of the USDA offices.


What Is the USDA Upfront Guarantee Fee

As mentioned earlier, the government supports lenders with a default insurance. The lender default insurance is generated by a guarantee fee that is charged to the borrower. The cost of the guarantee fee is 1% of the loan. The guarantee cost is less than the 2.25 percent upfront financing fee charged by the FHA.

The VA home loan requires an upfront funding fee that's similar to the USDA loan program and the FHA program. The funding fee ranges from 2.3% for a no down payment loan to 1.4% with a 10% down payment. Veterans receiving disability compensation and Purple Heart veterans are exempt from the upfront VA funding fee.


Is There Monthly Mortgage Insurance

Young family with the kidsIn addition to the guarantee fee, the USDA loan programs requires the payment of an annual fee to the USDA. The annual fee gets folded into the default protection fund. The cost of the annual premium is .35% of the current loan amount. In order to lessen the impact on the borrower's budget, the annual cost is paid in 12 equal installments.

For example, if the loan balance is $100,000, multiply the loan amount by the annual fee by .35% which equals $350. Now divide the cost of the annual fee by 12 months. The result is $29.17, and that amount will be added to the borrower's monthly loan payment.

The FHA also requires a monthly fee, called mortgage insurance (MIP). The monthly charge is .85% of the loan amount for mortgages with the minimum down payment of 3.5%. The FHA monthly fee is considerably higher with FHA loans.

The VA loans do not require a monthly fee.

Conventional mortgages are provided by private lenders and are not backed by the federal government. Consequently there is no required upfront or guarantee fees. But since the conventional loans are not backed by the federal government, the interest rates tend to be higher than USDA home loans. The approval guidelines can be more significant. And, if the down payment is less than 20%, borrowers are required to pay mortgage insurance. The PMI cost is greater than with the USDA and FHA home loans.


How Much Is the Usda Down Payment?

There is no down payment requirement with USDA home loans. The USDA loans are literally 100% financing, and the upfront guarantee fee can be rolled into the loan amount.

The minimum down payment for an:

What Is a Seller Concession?

USDA loans allow the seller to contribute up to 6% of the sales price toward the buyer's closing and prepaid costs.

The FHA program also allows a 6% seller concession. The VA mortgage permits the seller to pay all closing costs. The conventional program limits home buyers with less than a 10% down payment to only 3% seller concession for closing costs.

Do USDA Loans Have a Downside?

The USDA requires homes to be located in designated rural areas and applicants must meet the USDA established income limits. The USDA provides an easy to use lookup tool for both income and area lookups. USDA Lookup Tool

As mentioned earlier, there are two USDA purchase programs. The Guarantee program is available through commercial lenders. Applicants must meet the area and income requirements.

The Direct program is originated through the USDA directly. The Direct program available whose income is 50% or less than the median family income for the area where the home is located. The interest rate is lower than the interest rate for the Guarantee program.

So are Usda loans good? You be the judge.

Reduced interest rate
Down payment - 0%
Seller paid costs (if agreed) - up to 6%
Upfront (guarantee fee - 1%
Monthly fee - .35% (of the loan amount/divided by 12)

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.