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For first-time home buyers, it can be challenging to save up for a down payment. Down payments vary considerably — from the 3.5% required for FHA loans for first-time buyers to the 20% that many Americans believe should be their minimum down payment.
For many, though, even saving up 3.5% can seem like an uphill battle. For a $250,000 house, this would be $8,750. Naturally, this is often seen as a significant hurdle to homeownership.
But there’s another option that’s often overlooked: a USDA home loan.
USDA loans, also called USDA Rural Development Guaranteed Housing Loans, offer a number of benefits, the key one being 100% financing, which means that would-be home buyers don’t need to secure funds for a down payment. They’re also more forgiving when it comes to your credit score and offer competitive interest rates.
While these loans aren’t for everyone, for those who qualify, they can represent a lifeline for getting onto the property ladder.
Do You Qualify?
USDA home loans are mortgages that are backed by the U.S. Department of Agriculture. Thanks to their name, you might be tempted to think that these loans are only for farmers, but USDA loans aren’t designed for farms — or any commercial property. Instead, they’re for homes that are in places the USDA considers rural or suburban, towns with a population of less than 35,000. This, incidentally, is most of the U.S. In fact, it’s estimated that 97% of U.S. land is eligible for this loan.
In addition to the property’s location, there are other requirements that will need to be met. First, your income will need to fall below a certain threshold. Additionally, the property itself must meet specific criteria, including:
• Water, electrical, heating, cooling systems must be working and up to date.
• The house and its foundation must be structurally sound.
• The property must be accessible via a paved or all-weather road.
In addition to the property requirements, there are a few more key requirements for USDA loans:
• Citizenship: You’ll need to have U.S. citizenship or permanent residency.
• Income: You’ll need to have had reliable income for at least two years. Your income will also need to fall below a certain threshold. While this amount varies by region and occupants, generally, it should fall below the following thresholds: $74,750 for a family of one to four people, or $98,650 for a family of five to eight people.
• Credit history: Even if your credit score is low, you may still qualify for a USDA loan. However, you must also not have had any collections over the last year.
• Debt ratio: You’ll also need to have a debt ratio of 41% or less, unless your credit score is 680 or higher. If your credit score is 680 or less, then your repayments cannot be more than 29% of your monthly income.
You must also agree to occupy the dwelling as your primary residence. You’ll need to demonstrate a willingness to meet your credit obligations in a timely manner, and have the legal capacity to incur the loan obligations in the first place.
USDA Loan Terms And Benefits
USDA loans are designed to help invigorate rural areas and provide low- and moderate-income households with the chance to own adequate, decent, safe housing. It’s also worth noting that the USDA issues mortgages to applicants who are deemed to have the greatest need. That may include individuals or families who are without decent, safe and sanitary housing; are unable to secure a home loan from traditional sources; or have adjusted income that is at or below the low-income limit.
• No down payment required: One of the key benefits of USDA loans is that they allow you to obtain a mortgage with a 0% down payment. Still, keep in mind that 100% financing can be risky. In most cases, it’s a good idea to make a down payment, even if it’s relatively small.
• Low interest rates: With USDA loans, interest rates are not based on your credit score or down payment. Instead, they’re the same across the board. This means borrowers with a low credit score could secure a better rate than they would through a traditional mortgage.
• Fixed-rate terms: USDA loans have fixed 30-year or 15-year interest rates. This is in contrast to riskier variable interest rate loans, where interest rates are subject to change at any time.
• Closing cost assistance: Closing costs generally total between 2% and 5% of the purchase price. With a USDA loan, the seller can pay up to 6% of the closing costs. Sometimes these costs can be included in your mortgage loan.
Limitations And Fees
Generally, USDA loans are for homes that are 2,000 square feet or less, and with a market value that doesn’t exceed the area loan limit. This limit varies from market to market, ranging from just over $100,000 in some rural markets to $500,000 in more costly areas.
Then there are the fees. While USDA loans don’t require mortgage insurance (PMI), they do carry other fees. For starters, they have a fee of 1% that’s payable throughout the lifetime of the loan. There’s also a 0.35% annual fee on the loan amount, which must be paid off over a 12-month period.
While making a higher down payment is often a sensible choice, the value of a USDA loan is that it can help open the door to homeownership to those who might not be able to save enough fast enough, and give a leg up to those who are struggling to get their foot on the property ladder. Your best bet is to shop around to see what you qualify for, and find a lender that will offer you a loan with the best terms possible.