What if we told you it is possible to get a home loan in 2018 with zero money down, lower rates than FHA financing, and even can finance closing costs? You might say we lost our minds. But if you get a home loan backed by the US Department of Agriculture (USDA), you may enjoy all these benefits by buying a rural home.
The USDA offers attractive rural home loans to people in designated rural areas. This is done to entice people with lower incomes and credit scores to settle down in less populated parts of the US. The USDA uses US Census population data and other information to determine what is ‘rural.’ Then, it allows potential buyers in these areas to get a USDA backed loan from a mortgage lender it has approved.
What Makes the USDA Loan So Good?
USDA backed home loans are attractive for several reasons. First, you do not need a down payment with your loan. It is very rare in 2018 to get a home loan that does not require a down payment. Most 100% loans went out with the last financial downturn, but not at USDA. But the rates on USDA backed loans are very low, even lower than FHA interest rates.
Another benefit of USDA home financing is you do not have to pay for monthly mortgage insurance. With an FHA program you must pay for costly mortgage insurance on top of your loan payment. USDA mortgages only require a small annual mortgage insurance fee and a 2% upfront payment for mortgage insurance. These costs are lower than FHA’s. Plus, you can have the upfront mortgage insurance wrapped into your loan cost, so you can effectively have a zero-down payment.
So, What Are the Downsides?
The major catch with USDA loans is there are income limits on who can get these mortgages. If you earn more than 115% of the median income of your area or already have what USDA calls ‘adequate housing,’ you cannot get a USDA mortgage. Also, you must buy a home that is ‘modest in design, cost and size,’ and also meets USDA building codes.
Another catch for some people could be credit. There is not a definite minimum credit score, but most lenders will have difficulty approving people with a score under 620. That is higher than the credit limit for an FHA; those government loans have a very low credit score minimum of 500, and 580 for a 3.5% down payment. But you can offset a low-credit score by showing you have financial reserves in your bank account, or a current monthly rent that is higher than your future mortgage payment.
Last, you must live in an area that USDA considers rural. You can check the USDA website to see if the area you are considering is ‘rural’ by USDA standards. Some suburban areas may be considered rural by USDA.
Why You Should Get a USDA Loan Soon
The USDA determines by US Census data results which areas of the country are rural and eligible for USDA loans. The USDA has not updated its loan map since 2000, and a lot of growth has occurred in the last 18 years. Many areas that were rural years ago are actually busy suburbs. A 2011 study found that 97% of the land mass of the US is eligible for USDA loans. Thus, 1/3 of people lived in areas that were eligible for these loans when the report was released in 2000.
Even if you are interested in a USDA mortgage after the agency updates its map, you still may be able to get a loan for that home of your dreams. Congressional action is going to grandfather many parts of the country. Still, if you think you want to live in a rural area, it would be smart to get approved for a USDA mortgage as soon as you can.
Other than the geographic area restriction, the most common issue with USDA loans is the income limits. There are a lot of people who want to move out of the big city into a rural area. But they earn more than 115% of the median income of people in that area. If they do not have high credit scores, what should they do? We advise these people to consider the FHA option. You will have to come up with at least a 3.5% down payment, and mortgage insurance is not cheap. But there are no income restrictions on FHA home financing. As long as you can document the income to pay the mortgage, you probably can be approved.
References: Retrieved from What Are the USDA Home Loan Requirements in 2018