If you’re looking to buy a home, but have little to no money for a down payment then the USDA Loan may be the fit program for you. In this article, we’ll dive into everything you need to know about USDA Loans, including their types, eligibility requirements, advantages, and limitations.
Along with VA loans, the USDA Loan is a government-backed loan option. It is one of the last remaining $0 down payment mortgage options for homebuyers. Because the government is guaranteeing these loans against default, lenders can confidently extend more favorable terms on their loans.
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USDA Loans Benefits
There are 4 major benefits that the USDA Loan provides to homebuyers:
- No Down Payment
- Low-Interest Rates
- Low Monthly Mortgage Insurance
- Flexible Credit Guidelines
No Down Payment
The USDA Loan does not require a down payment from the home buyer making homeownership more accessible to individuals who may not have been able to save on their own. Over the last 10 years home prices have increased significantly making it harder for renters to save the required 3.5-20% down payment for FHA and Conventional Loans. it has become a growing favorite for first-time homebuyers.
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Due to the government guarantee, interest rates for USDA loans are some of the lowest on the market. It is important to know that the lender will take into consideration your credit score and personal financial history when providing you with rate options. But that rates are typically much more competitive than those compared with other mortgage options.
Low Monthly Mortgage Insurance
While conventional lending options mandate “private mortgage insurance” (PMI) when a homebuyer purchases with less than 20% down payment. The USDA loan does not require PMI. This can make a significant difference in the monthly mortgage payment compared to those of FHA and Conventional Loans.
Instead, the loan employs a different fee structure, consisting of an upfront guarantee fee paid during loan closure, and an annual fee incorporated into your monthly mortgage payment. The upfront fee amounts to 1 percent of the total financed amount, while the annual fee equates to 0.35 percent of the current balance on the loan.
Among various government-backed mortgage products, USDA loans stand out by offering the lowest funding fee, ensuring cost-effective financing options.
Flexible Credit Guidelines
While conventional lenders typically seek a credit score of 640 or higher, aiming for around 720 can secure the lowest interest rates. Interestingly, USDA loans do not impose a minimum credit score requirement. However, to utilize the USDA’s automated underwriting system, a score of 640 or higher is necessary. Fear not, as borrowers with lower credit scores can still qualify for USDA loans through manual underwriting, ensuring accessibility to this advantageous financing option.
Common Questions about USDA Loans
- Eligibility Requirements
- Approved Zip Codes
- Property Eligibility
- Income Limits
- First-Time Homebuyers