Did you know you can buy a house without putting a single dollar down on the closing table? Though it sounds too good to be true, the United States Department of Agriculture Guaranteed Rural Development Loan, also known as a UDSA or rural development loan, helps potential homebuyers become homeowners with several perks unheard of with different loan programs.
Here are five ways a USDA loan benefits homebuyers.
No Down Payment
The fact that the USDA loan program allows homebuyers to achieve 100 percent financing is undoubtedly the greatest benefit of using a USDA loan. Though first-time and repeat homebuyers are eligible for this loan program, the biggest hurdle most first-time buyers face is the ability to gather enough funds for a down payment.
In comparison, borrowers are required to supply a minimum 3.5 percent down payment for an FHA loan and 5 percent for a conventional loan.
Lower-Than-Market Interest Rate
Because a USDA loan is insured by the U.S. Department of Agriculture, borrowers are offered a low, across-the-board interest rate that does not vary based on their credit score or down payment, as it does with conventional financing.
Low Monthly Private Mortgage Insurance (PMI)
Private mortgage insurance is required for any loan with less than 80 percent loan-to-value, regardless of loan program. So if a borrower is taking advantage of the USDA loan’s no required down payment, they will be required to pay monthly mortgage insurance.
The upside is that the USDA loan’s private mortgage insurance rate is the lowest of any loan program and doesn’t change based on your down payment, as it does with conventional financing. Currently, the USDA loan’s PMI annual fee is 0.50 percent, based on the loan’s remaining principal balance.
Flexible Credit Guidelines
This government-backed loan also allows some borrowers with blemished or limited credit histories to qualify for home financing. Lenders may accept “alternate” tradelines, such as rent, utilities, cell phone bills, etc. to represent a payment history if the borrower’s credit history is too short.
Ability to Finance Upfront PMI
As with FHA loans, USDA loans also requires an upfront premium – 2 percent of the loan amount. The USDA allows borrowers to roll this fee into their financing and close on the loan without putting any money down.
As with any home loan, borrowers wishing to finance with a USDA Guaranteed Rural Development Loan are subject to eligibility requirements, including income, property, credit, and area. Contact one of our mortgage bankers.
Buying your first home? Our Mortgage 101 Handbook is a great go-to for beginning homebuyers who want to know more about home financing, common terminology, mortgage products, and the loan process.