Some people decide to move to the rural area and replace pavement with pastures. If you are one of them, you may need a mortgage to become a proud homeowner. However, not every consumer is wealthy enough and eligible for a regular mortgage.
USDA loans present an alternative solution for low-income households and offer zero-down-payment mortgages for people who plan to purchase a home in the rural area. Here is what you need to know about these loans, how to obtain them, as well as their pros and cons.
What Is a USDA Loan?
There are thousands of people who don’t have enough money for a down payment to obtain a mortgage. However, they are still willing to purchase their own home. While it may be challenging to qualify for a traditional mortgage and it’s really expensive to afford to buy a house in the town, you may seek alternative ways and get a USDA home loan. Keep in mind that guaranteed loan approval no credit check direct lender, in reality, means your application may be approved or rejected depending on your creditworthiness.
A USDA home loan is a no-down-payment mortgage for low-income consumers in rural areas. These lending options belong to the national program launched by the U.S. Department of Agriculture to help every family purchase their own home. This program is suitable for consumers who can’t meet traditional mortgage demands but agree to live in the suburbs. There are many advantages of this loan as the credit requirements are looser and there is no down payment.
Eligibility Criteria for Getting a USDA Loan
Any mortgage has certain eligibility requirements and a USDA home loan is no exception. Here are the criteria you should meet in order to be eligible for this lending option to purchase your property:
- be a US citizen or permanent resident with a Green Card;
- have a minimum credit rating of 640 and higher;
- the property is situated in an eligible rural area;
- you have a steady source of income;
- the home will be your primary residence;
- you can offer a history of on-time payments for rent, bills, or auto loans.
How USDA Home Loans Work
There are three USDA home loan programs you may choose from:
- Direct loans. Such loans are issued by the USDA. This is a mortgage suitable for low-income households. The interest rates are typically very low and can be even 1% while the income thresholds change by region.
- Loan guarantees. A participating local creditor issues the mortgages guaranteed by the USDA. It works similarly to VA-backed loans or an FHA loan. This lending option allows consumers to obtain lower interest on the mortgage even if they don’t have money for a down payment. However, if you choose a mortgage without a down payment, a mortgage insurance premium should be paid.
- Home improvement grants and loans. These lending options allow clients to upgrade or repair their homes. Some options mean just a loan or just a grant, while other packages include both types and may offer up to $27,000 in financial aid.
Pros and Cons of USDA Loans
Each lending option comes with benefits and downsides. The obvious advantages of getting a USDA home loan are minimum credit rating demands and no down payment obligation. It can become a great option for first-time homebuyers who have flexibility about the place they want to live in and are on a budget. The downsides include certain limitations on how much you should earn to qualify and where you may purchase the home.
- Minimum credit rating demands;
- No down payment is necessary;
- Lower and fixed rates;
- Suitable for both refinancing and purchasing property;
- The seller may pay the closing expenses.
- Strict demands about the place where the home should be located;
- Upfront and annual charges;
- Limited income demands;
- Must utilize home for a primary residence.
USDA Home Loan Fees
There are two fees that are specific to this lending program: an annual fee and an upfront guarantee fee. The annual fee is 0.35 percent of the overall loan sum. The upfront guarantee fee is 1 percent of the total loan sum in 2022.
You may want to roll this fee into the mortgage rather than pay it out of pocket. Hence, if you have a $100,000 mortgage, it will have a $1,000 one-time payment and a $350 annual ongoing payment for the life of the loan.
These finance fees are charged to the creditor. The creditor will pass the expenses on to the client. Any losses incurred by this program will be paid by these fees so they keep USDA home loans subsidy-neutral. These finance charges might change each year depending on the needs of this program. Other costs associated with USDA mortgage may include:
- Title insurance;
- Loan application fee;
- Origination fees;
- Credit report and notary charges;
- Processing fees;
- Discount points.
This mortgage program is tailored to the needs of moderate- and low-income households who want to purchase their home. Thus, applicants can’t have a higher income than the particular limits stated in the application. These income limits vary by family size and area.
The income limits are typically higher in more expensive areas. Generally, for a one- to four-member family the annual income limit is $90,300 while the income ceiling for five- to eight-person households is $119,200.
The Bottom Line
To sum up, getting a USDA home loan can be a perfect chance for low- and moderate-income families to become proud homeowners. While every lending option has benefits and drawbacks, it’s suitable to choose this loan if you agree to live in a rural area and want to get lower interest rates.
On the other hand, you should follow strict guidelines about the place where your home is located and check the maximum income limit for your area and family size. Take some time to review the pros and cons and make a savvy decision.