The USDA guaranteed home loan is often referenced when financial pros run down ways in which first-time home buyers can get around the 20 percent down payment dilemma. So what is this home loan for, and how is it one of several great low down payment options available for Americans?
USDA Home Loans: Some Background
The USDA Rural Development Department offers two loan types: a direct mortgage loan that is financed through the USDA and designed to assist low- and very-low-income applicants, and the guaranteed loan, which is backed by the U.S. government, offered by private lenders and designed to help low and middle-income households buy homes.
What many don’t realize is that this guaranteed loan offers 100 percent financing to income-qualified individuals, making it as close as you can get to a subprime loan, only with a safe, low fixed interest rate and payments!
A USDA guaranteed loan can be used to build, rehabilitate, improve or relocate a dwelling in an eligible rural area. What many don’t realize is that this guaranteed loan offers 100 percent financing to income-qualified individuals, making it 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, and tacks on both an upfront fee (1 percent of the loan amount, which can be rolled into the loan) and an annual fee (0.35 percent of the average scheduled unpaid principal balance, paid monthly in equal installments). Plus, the lender, not the USDA, determines the interest rate.
Why a USDA Guaranteed Home Loan is a Good Choice
There are many advantages to choosing a USDA-backed mortgage.
One hundred percent financing makes these loans among the most desirable loan programs still in existence. VA loans and transactional funding for those flipping houses are the only other comparable programs.
Even better than just no down payment, going this route means the possibility of rolling in closing costs or using grants and gift funds, something most other programs won’t allow borrowers to do.
Want more? You can use “non-traditional” credit, like cell phone, insurance and utility bills, to qualify if you don't have much credit history, and you don’t have to have an amazing credit score to get approved — 640 or higher will get you there.
And this financing option is ideal for the buyer who wants to take advantage of cheap land prices, buy a foreclosure, fix up the home of his or her dreams or just get out of the city, grab a few acres and raise kids in a safe environment — with plenty of room to grow.
Requirements You Need to Meet and Other Rules
Of course, there are a couple of catches. Be sure to review these before you proceed:
- 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.
- Guaranteed loans are limited to 15-year and 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 three years out of a Chapter 7 bankruptcy discharge and be “credit worthy.”
- The property must be in an approved rural area.
- If you already own a home, you cannot use the USDA home loan to purchase a second home, unless you can prove that you've outgrown the first or your employer requires that you relocate.
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.
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.
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 would-be home buyers out there who don’t know that USDA loans even exist.