No, USDA home loans aren’t for those who need to stock up their fridges with some extra beef or restricted to those who have decided to start their own organic farms.
So what are USDA home loans for, and why are they the only type of mortgage loan you may want to apply for?
USDA Home Loans the New Subprime Mortgage Option?
While the USDA Rural Development Department offers a direct mortgage loan, they also offer a guaranteed loan, backed by the U.S. government, similar to FHA or VA loans.
Originally designed to help rural Americans realize the dream of homeownership, these mortgages can also be used to finance a wide array of properties from single-family homes to multifamily properties and even businesses. Plus, the USDA also provides grants for various development projects.
A USDA loan can be used to purchase, refinance, renovate, repair or even relocate a home. What many don’t realize is that these guaranteed loans offer 100 percent financing to income-qualified individuals, making them as close as you can get to a subprime loan, only with a safe, low fixed interest rate and payments! Be aware, however, that the USDA only guarantees 90 percent of the loan.
Why a USDA Home Loan Should be Your First Choice
There are many advantages to choosing a USDA backed mortgage.
One hundred percent financing makes these loans among the most desirable of loan programs still in existence. The only other programs out there that offer this today are VA loans and transactional funding for those flipping houses.
Even better than just no down payment, going this route means the possibility of rolling in closing costs or use grants and gift funds, something most other programs won’t allow borrowers to do.
Want more? You may even qualify using “non-traditional” credit and you don’t have to have amazing credit to get approved either. You should have at least a 620 to 640 credit score, but you may be able to use credit references like cell phone, insurance and utility bills to build out your credit if you don’t have very much of it.
Plus, USDA direct home loan interest rates are some of the best around and often better than conventional mortgage rates. The rates on guaranteed loans are determined by the individual lender.
The Perfect Loan to Address Current Trends
USDA-backed home loans are really designed to assist lower income borrowers, though who hasn’t found times a little more challenging lately? Well, unless you are Mark Zuckerberg, you have a gazillion shares of Google, or are next in line for promotion at Apple, you may have a good shot at getting approved. These incredibly attractive financing options are also ideal for those who want to take advantage of cheap land prices, buy foreclosures, fix up the home of their dreams or just move a little ways out of the city and grab a few acres for raising the kids with more room in a safer environment.
Who Doesn’t Stand a Chance of Getting a Loan Like This?
Of course, there are a couple of catches to getting a loan like this:
- Income eligibility is capped at 115 percent of your median area income. To check your eligibility, use the income eligibility calculator at the USDA website.
- These are strictly 30-year fixed rate loans.
- You must be able to qualify with maximum debt-to-income ratios of 29/41. To determine if you qualify, add the loan principle, taxes, insurance and interest and divide the sum by your gross monthly income. If this calculates to 29 percent or lower, you qualify. Additionally, your total debt, divided by your gross monthly income must be equal to or less than 41 percent.
- You must be at least two years out of a bankruptcy discharge and be “credit worthy.”
- The property must be in an approved rural area.
- You cannot own another home within commuting distance of the home you wish to purchase.
Comparing USDA Mortgages to Other Common Options
Unless you want to put down a lot of money on a home, USDA beats out conventional financing and even requires less money out of pocket than FHA.
You’ve got cash? Well, think again. There are still tax advantages to taking out a mortgage. Plus, you never know when the thing is going to get blown down and your insurance company is nowhere to be found. You’ll want that extra cash in your pocket then. Just don’t stash it under your mattress or exceed FDIC insured limits in any one banking institution. Who knows who is next to go under, and you may not even get as much as a Bernie Madoff victim if your bank tanks.
USDA may also be a great option for military veterans who have burnt their VA loan eligibility options, and it will be a lot safer taking out an institutional loan than gambling on shady seller financing.
So Where’s the Beef?
With 100 percent financing and easy qualifying, asking about USDA home loans is smart. Make sure you spread the word, too, because there are many others out there who are desperate to buy homes or refinance who don’t know that USDA loans even exist. Your tax dollars go to guarantee these programs, so isn’t it about time you got something back?