Borrowers in need of a no-down payment program are in luck with the USDA program. This is the only loan program available with no down payment requirements aside from the VA loan which requires military service. In addition, the USDA program has minimal credit guidelines, giving borrowers with lower credit scores a chance to become homeowners. Another great point about USDA loans is the USDA loan rates because they are very competitive with other loan programs.
A Government-Backed Loan
USDA loans are backed by the government which means that lenders have protection against default. This allows lenders to provide lower interest rates to borrowers despite the possible credit risk they pose. Today, USDA loan rates are among the lowest rates available compared to any other loan program.
USDA Mortgage Insurance
Aside from the USDA loan rates, you also need to consider the cost of mortgage insurance. USDA loans are not the only program that charges mortgage insurance – FHA charges upfront and annual mortgage insurance and conventional loans charge Private Mortgage Insurance if you put less than 20 percent down. The VA loan is the only program without annual mortgage insurance fees, but they do charge an upfront funding fee.
If you compare mortgage insurance rates between USDA, FHA and conventional loans, you will find that USDA loans have the lowest rates. As of today, the annual fee for USDA loans equals 0.35% of the outstanding loan amount. This recently decreased from 0.5%. FHA loans charge 0.85% annually, which is a difference of 0.5%. On a loan amount of $150,000, FHA loans charge $750 more in insurance premiums per year. If you look at this over the life of the loan, the FHA charges almost $20,000 more on insurance premiums.
Another factor to consider, however, is the upfront fees that each loan program charges. Conventional loans do not have upfront mortgage insurance or a funding fee. USDA and FHA loans, however, do charge an upfront fee. The FHA program charges 1.75% of the loan amount upfront and the USDA program charge 1% upfront. You are able to wrap the USDA upfront guarantee fee into your loan amount. This helps to alleviate the need to bring any cash to the closing. The FHA loan does allow the same thing, but the amount is higher, which makes your principal loan amount higher.
The Benefits of the USDA Loan
As you can see, there are many benefits of the USDA loan. Not only do you not have to bring any money to the closing to make the down payment or pay the upfront guarantee fee, but you can receive the lowest interest rates on the market.
In addition, the USDA loan is easy to qualify for and allows for many different special circumstances. In general, you need to meet the following requirements in order to qualify:
- You must not currently have suitable housing or if you do, you must sell it before you can close on a new USDA loan.
- You must purchase a property located within a rural area as determined by the USDA. You can see the areas on their map to determine if your property qualifies.
- The amount of your household income cannot exceed the guidelines created by the USDA. You can see the guidelines on their website and filter them to meet your specifications. You receive allowances for certain household members including children under the age of 18, full-time students over the age of 18, elderly household members and those with disabilities.
- Your credit scores should be around 29/41, but the USDA does allow certain exceptions if you have compensating factors.
- Your credit score should be around 620 or higher, but the USDA does allow scores as low as 580 if you can find a lender willing to take the risk.
- You should make sure all collections are paid and late payments are brought current.
USDA loans are a great option for borrowers that do not have any money to put down on a home, but have a decent credit history. If you can prove that you can afford the loan without making too much money, you may qualify for this rural program. It might surprise you to see which properties the USDA considers rural. You might be able to purchase a home you did not consider rural with the USDA program, taking advantage of the no down payment requirements and the low USDA loan rates.
As with any loan program, it pays to talk to various lenders. Any USDA approved lender can provide you with a quote for a USDA loan. You might even find one lender that grants exceptions for any special circumstances you bring to the table. If you do not receive approval from one lender, do not be afraid to shop around because every lender has different requirements and different thresholds for the level of risk they can take. The USDA loan provides many people the opportunity to become homeowners that otherwise would be ineligible to secure safe and sanitary housing.