USDA Loans – They Aren’t What You Think!
It might be the best kept secret in home buying. Through a U.S. Department of Agriculture (USDA) loan, you can purchase a home with no down payment, low interest rates and relatively lenient qualifying restrictions.
So, what’s the catch? None, really, other than the fact that USDA loans aren’t for every home buyer and there are guidelines to follow (such as fees that will be worked into the monthly payment, essentially taking the place of mortgage insurance). In exchange for the fees, though, USDA loans are especially useful for consumers who aren’t wealthy and may not be able to get a traditional mortgage.
The loan program, officially known as the USDA Rural Development Guaranteed Housing Loan Program, has maximum income requirements and the home must be in an area labeled as rural by the USDA. While there is no maximum loan amount for USDA mortgages, there are income restrictions that prevent borrowers from earning more than 115% of the area’s median income (with variables for family size).
Hint: If you’re from a metropolitan area and want urban living, a USDA loan won’t be for you. But it’s not exclusively for farmers and ranchers, either. Your occupation isn’t part of the qualification process, so there’s no need to start growing your own food or baling hay. Rural areas are cornerstones of the USDA loan program, but so are qualified suburban settings.
The program is worth considering since the USDA provided $19 billion last year to help 140,000 families either purchase, refinance or repair their homes.
How do you qualify for a USDA loan? You must meet these basic guidelines:
– U.S. citizenship (or permanent residency)
– Loan must be for an owner-occupied primary residence
– A monthly PITI payment (Principal, Interest, Taxes, and Insurance) that is 29% or less of your monthly income. Your monthly housing in addition to other debt payments can’t exceed 41% of your income. Higher debt ratios will be considered with compensating factors, such as strong liquid reserves or credit scores above 660.
– Evidence of dependable income (usually for a minimum of 24 months) that is within the programs restrictions in your area.
– Good credit history. Although, you could still qualify by proving some credit was affected by drastic circumstances, such as medical emergencies. Many lenders that offer USDA loans require a credit score of 620 or higher.
Here’s how USDA loans work.
Typically, the USDA guarantees a mortgage issued by a participating local lender such as Paramount Partners, using a similar method that the FHA and VA do for their respective programs. Sometimes, the USDA will issue direct mortgage loans, usually for extremely low-income applicants who are without “decent, safe and sanitary housing.’’ It also provides home improvement loans and grants. The primary advantage of a USDA loan is to avoid the burden of a large down payment. Once approved, you’ll receive a loan for 100% of the purchase price with a competitive interest rate, no prepayment fee and a loan term of up to 30 years. Interest rates on USDA loans are usually comparable to a conventional mortgage.
There are still fees for USDA loans though. These loans require an upfront 1% fee on the loan amount, but it can be added to the loan balance and absorbed into your monthly payment over the life of the loan. This helps to limit funds needed at closing. There’s an additional annual fee of 0.35% on the loan amount that must be paid over 12 months. However, those fees are lower than FHA and VA sponsored loans.
So, don’t be so quick to rule out a USDA mortgage loan from Paramount for your next home purchase or refinance. If you qualify, there are legitimate advantages to them. And you don’t need to be a farmer to be eligible.