The Pros of USDA Loans
Compared to other mortgage options, USDA loans have several benefits, chief among them being the USDA’s guarantee against loan default. Lenders are therefore able to assume greater risk and provide homebuyers with advantageous loan terms.
The most frequently mentioned benefit among the many is the ability to get 100% financing without needing to save for a down payment for years. This government-backed loan option is one of the last mortgages available with no down payment, along with VA loans.
Compare that to other loan options:
| Loan Type | Minimum Down Payment Required |
|---|---|
| USDA | 0 |
| FHA | 3.5% |
| VA | 0 |
| Conventional | Typically 5- 20% |
In the past 24 hours, 1,547 people were able to locate a USDA lender!
Lenders are able to provide some of the lowest interest rates available because of the USDA guarantee. Although actual rates will differ between lenders due to other factors, be aware that your credit history and the state of the market have a significant impact on your mortgage rate.
Low Monthly Mortgage Insurance
In the event that you are unable to provide a twenty percent down payment for a conventional loan, lenders will force you to pay “private mortgage insurance” (PMI) FHA loans also have high annual mortgage insurance fees.
USDA loans, on the other hand, dont have PMI. Rather, the USDA employs two fees: an annual fee that is included in your monthly mortgage payment and an upfront guarantee fee that is paid only once at loan closing. The annual fee is zero, but the upfront fee is one percent of the entire financed amount. 35 percent of the loans current balance.
The funding fee for USDA loans is the lowest for all government-backed loan products.
Heres how USDA mortgage insurance compares on a $200,000 mortgage:
| Loan Type | PMI Features | Mortgage Insurance Rate | Estimated Costs |
|---|---|---|---|
| USDA | Borrowers pay annual fee for the life of the loan. | 1% Upfront Funding Fee 0.35% Annual Fee | $2,000 Upfront $58 per Month |
| FHA | Borrowers pay annual fee for the life of the loan. | 1.75% Upfront Funding Fee 0.85% Annual Fee | $3,500 Upfront $139 per Month |
| VA | Fee varies based on nature of service, down payment and first-time use. | 2.15% Funding Fee for Most Purchase Loans | $4,300 Upfront |
| Conventional | Rate varies based on credit score and down payment amount. | 0.2 – 1.5% PMI | $1,000 – $2,000 Annually |
PMI usually stops for conventional loans when the borrower’s loan-to-value ratio approaches 80%.
By making a minimum 5% down payment, borrowers with FHA and VA loans can reduce their mortgage insurance costs.
Although the majority of traditional lenders require a credit score of at least 640, to be eligible for the best interest rates, you’ll need a score that is closer to 720. Fortunately, USDA loans do not require a minimum credit score; however, in order to use the USDA’s automated underwriting system, your score must be 640 or higher. By using manual underwriting, borrowers with lower credit scores can still be eligible for USDA loans.
Most of the country is located in what the USDA defines as an eligible rural area. Although increasing the population in non-urban areas is the aim, the USDA’s definition of rural areas covers a wide range. Actually, any area with fewer than 35,000 residents qualifies as “rural.” This implies that 97% of the nation may be eligible for a USDA loan.
Ability to Use if You Already Own a Home
Even though this benefit is restricted in some ways, you can apply for a USDA loan even if you own additional real estate. The most important thing to remember is that a prior USDA loan cannot be used to finance the other property.
Common fixed-rate terms, such as 30-year and 15-year mortgages, are offered for the USDA loan.
Comparing the Loan Types
According to the most recent USDA data, the average USDA mortgage in 2018 was $115,864. Lets take a closer look at the four major loan options with a real-world scenario. For a simple comparison, lets compare a $150,000 mortgage with an interest rate of 4.75 percent. Well assume that you are making the minimum required down payment for each loan type and use a consistent estimate for monthly property taxes and homeowners insurance ($250).
| Loan Type | Minimum Credit Score | Minimum Down Payment | Funding Fee* | Principal & Interest | Taxes & Insurance | Mortgage Insurance* | Monthly Payment |
|---|---|---|---|---|---|---|---|
| USDA | 640 | $0 | $1,500 | $790 | $250 | $44 | $1,084 |
| FHA | 640 | $5,250 | $2,625 | $769 | $250 | $106 | $1,125 |
| VA | 640 | $0 | $3,225 | $799 | $250 | $0 | $1,049 |
| Conventional | 640 | $7,500 | $0 | $743 | $250 | $90 | $1,083 |
*Note: The amounts for Private Mortgage Insurance and Funding Fee for each type of loan are based on the standard fees associated with government guarantees.
As you can see, considering these criteria, the two zero-down options have the lowest monthly payment. However, keep in mind the second advantage mentioned above: USDA loans often have some of the lowest interest rates available, so depending on other compensating factors, your particular situation may result in even greater savings.
Minimum credit scores will change depending on the lender, kind of loan, and other elements. Although credit scores below the specified minimums are acceptable for FHA, USDA, and VA loans, most lenders demand at least a 640 score for any government-backed mortgage.
How to Start your USDA Loan
To find out if they qualify, prospective homeowners can get in touch with a home loan specialist.
Check your eligibilityfor a $0 Down USDA Loan
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FAQ
What is the advantage of a USDA loan?
No Down Payment: The fact that USDA loans don’t require a down payment is one of their biggest advantages. For first-time homebuyers who might not have enough savings for a conventional down payment, this feature is extremely beneficial.
What is one disadvantage of a USDA loan?
USDA loans have an additional benefit in addition to not requiring a down payment: if you have low income, you may be eligible for a low, fixed interest rate. However, there are certain disadvantages: the property has to be in a USDA-approved area, and the borrowers’ income cannot exceed certain levels.
Is a rural development loan the same as a FHA loan?
For those with lower incomes who wish to purchase in rural areas, USDA loans are the best option. When a borrower has little saved for a down payment and their credit score is too low to qualify for a conventional mortgage with a low interest rate, FHA loans are frequently the best option.
What is the income limit for a rural development loan in Minnesota?
Minnesota USDA Loans: The maximum allowable household income for a USDA loan for a family of four to five people in Minnesota is approximately $110,650, and it can reach $182,550 for a family of five or more.
Read More :
https://www.contourmortgage.com/news/what-are-the-benefits-of-a-usda-rural-development-loan
https://www.usdaloans.com/program/benefits/