Are you ready to achieve your dream of homeownership? If the answer is yes, then you’re probably exploring every option available to determine which loan programs you can qualify for – and which ones are best suited to your needs.
While many assume that USDA home loans are available only in rural areas, the truth is that geographically speaking, 97% of the country could potentially qualify. With that in mind, here are five reasons to consider a USDA mortgage home loan.
What is a USDA Home Loan?
The United States Department of Agriculture (USDA) offers home loans to qualified buyers in eligible areas of the country. The purpose of USDA loans is to put the dream of homeownership within reach for low and moderate income households in rural areas.
USDA home loans may be used to purchase existing homes in eligible rural areas with 100% financing, meaning that no down payment is required. They may also be used to do the following things:
- Build a home in an eligible rural area
- Rehabilitate an existing home
- Improve an existing home
- Relocate a dwelling
The program provides a 90% loan note guarantee to approved USDA lenders to reduce their risk, making it possible for people who can’t afford to make a down payment to buy a house.
The USDA home loan program was created to promote prosperity among low and medium-income families, thus allowing communities in rural America to thrive and grow.
What Are the Requirements for a USDA Mortgage Home Loan?
There are five basic requirements to qualify for a USDA mortgage:
- You must meet the income eligibility requirements, which say that your income may not exceed 115% of the median household income in your area. You can use the USDA’s free calculator to enter your state, city, and some details about your household to learn what the income requirements are. For example, a family of four in Jackson County would qualify for the Section 502 Guaranteed Rural Housing Loan Program provided that the applicants had a combined income of less than $91,900 per year. You can determine your eligibility here.
- You must be a U.S. citizen, a non-citizen U.S. national, or a Qualified Alien.
- You must agree to occupy the dwelling as your primary residence.
- The home you buy must be in a qualified rural area. You can use the USDA’s Eligibility Site to enter a specific address or search the map to identify general eligible areas.
- There is no minimum credit score requirement for USDA loans; however, you will need a score of 640 to use the USDA’s automated underwriting system. If your score is lower than that, you may still go through the manual underwriting process.
If you qualify based on your income and the location of your home, you will need to provide documentation to your lender to apply:
- Photo identification
- Copies of your most recent pay stubs
- Copies of your most recent bank statements
- Your last two federal tax returns
- If retired, award letters for your pension and/or Social Security benefits
- 1099 forms
- Quote for homeowners insurance
- Termite inspection from licensed termite inspector
- If the property you’re buying has a private water well, you’ll need a bacteria and chemical water test in accordance with FHA and HUD guidelines.
- If the property has a septic system, you may need a septic certification from a licensed company.
Leaders Credit Union is proud to be a USDA lender and we will work with you to ensure that you have all necessary paperwork to be approved.
5 Reasons to Consider a USDA Loan
Now, let’s review five reasons that you may want to consider the USDA loan program if you’re planning to buy a house.
#1: No Down Payment Requirement
The first reason you may want to consider a USDA loan is that financing is available up to 100% of the purchase price of your new home. That means you do not need to have money saved for a down payment.
For many low and middle income families, saving for a significant down payment can take years. With a USDA loan, you can make a down payment if you choose; but, if you don’t have the money for a down payment and want to buy a home immediately, you can do it with a USDA home loan.
#2: Lower-Than-Average Interest Rates
When you take out a 30-year mortgage, you end up paying far more than the cost of your home thanks to interest that compounds daily. If you can’t afford to make a 20% down payment or you don’t have a high credit score, you may end up with a higher-than-average interest rate that leads to thousands of dollars in additional expenses over the term of your loan.
With a USDA guaranteed loan, lenders can afford to offer lower interest rates to rural home buyers, even those with less-than-perfect credit and no down payment. You can expect rates that are below the market rates provided for conventional loans.
#3: Low Mortgage Insurance Costs
Private mortgage insurance is required for most home loans where the down payment is less than 20%. There is typically an up-front cost plus an annual cost that gets added to your monthly mortgage payment.
The USDA does require mortgage insurance but at rates that are significantly lower than some other programs. For example, FHA mortgage insurance equals:
- 1.75% upfront funding cost
- 0.85% annual fee
For a $250,000 home, that would mean you would pay $4,375 up front plus an additional $2,125 per year, or $177.08 per month.
USDA mortgage insurance costs significantly less than FHA mortgage insurance. The upfront cost is 1% of the purchase price, which for a $250,000 home would be $2,500. The annual cost is just 0.35%. That works out to $875 per year or $72.92 per month.
#4: Flexible Underwriting Guidelines
The next reason to consider a USDA mortgage home loan is that the underwriting guidelines are far more flexible than they are with a conventional loan. As we stated above, the USDA does not have a minimum credit score requirement. Even applicants with imperfect or problematic credit can qualify.
The USDA will accept alternative proofs of your ability to make payments in a timely manner, including things such as utility bills and rent payments. This type of flexibility is not available with traditional bank loans or even through other lending programs such as the FHA or the VA.
#5: Closing Cost Assistance is Available
With a typical home loan, your closing costs can range between 2% and 5% of your purchase price. For example, on a $250,000 home, you would expect to pay between $5,000 and $12,500 in closing costs, something that can put the dream of homeownership out of reach for low and middle income buyers.
One of the things that sets the USDA mortgage loan program apart from other programs is that buyers can negotiate with the seller to pay a portion of your closing costs. You also have the option to use gift funds to pay for your closing costs or to roll your closing costs (up to the appraised value of the home you’re buying) into your mortgage.
If you decide to roll your closing costs into your USDA loan, you should be aware that doing so will increase your monthly mortgage payment over the life of your loan.
Can You Get a USDA Loan if You Already Own a Home?
In most cases, the purpose of USDA loans is to make a home purchase possible for somebody who would not otherwise be able to purchase a home. Because USDA loans are exclusively for owner-occupied properties, you can’t use them to buy a vacation home or an investment home. However, there are a few exceptions that would allow you to get a USDA loan even if you are already a homeowner:
- Your current home is a mobile home. For the purposes of lending, the USDA does not consider a mobile home to be adequate housing, so you can own a mobile home and use a USDA loan to buy a single family home, condo, or townhouse. You will need to prove that you can afford to make payments on both homes.
- Your family has grown. A lot of people buy a starter home but as their family grows, it becomes too small for them. The USDA may decide to allow you to buy a home to accommodate your family while keeping your current home.
- You relocated for your job. If your employer requires you to relocate more than 50 miles away from your existing house, you may be able to keep your current home and purchase a new one with a USDA loan. You will be required to make the new home your primary residence and eligibility is on a case-by-case basis.
You will need to prove that you qualify for one of these exceptions. Keep in mind that the USDA requires a maximum housing debt ratio of 29% and a maximum DTI of 41% for approval. If you don’t qualify for an exception, you can still buy a home with a USDA loan; however, you will need to sell your current home before you can close on the new loan.
Do You Qualify for a USDA Loan?
Can you qualify for a USDA loan to make your dream of homeownership a reality? At Leaders Credit Union, our Mortgage Champions are here to help you determine your eligibility and to walk beside you throughout the application process.
Click here to learn more about our USDA loans and begin the application process today.