During the Great Depression, the United States Department of Agriculture (USDA)  started providing financial assistance to small landowners so that they get through those difficult times. Since then the USDA has been helping people belonging to the low and moderate income group to get loans and buy a safe, modest, and sanitary dwelling, in any of the areas within the USDA RD Home Loan "footprint." Lenders have no qualms in giving out these loans to qualified applicants, as the USDA guarantees a part of each loan. In this post, we discuss five factors that make USDA loans an ideal proposition to finance a home, for those who qualify¹.  

1.   No Private Mortgage Insurance (PMI)

The Private Mortgage Insurance (PMI) that usually applies to loans with a high loan-to-value (LTV) ratio (a.k.a. low down payment) does not apply to USDA loan borrowers. Instead, borrowers need to pay an upfront fee to cover any losses that lenders may have to bear in case the borrower defaults on their payments. The fee is much less when compared to PMI and, therefore, borrowers can expect a notable reduction in their monthly payment.

2.   Zero Down Payment

Other types of loans such as FHA require borrowers to pay 3.5 percent while for conventional loans borrowers need to shell out 5 percent as down payment. USDA loan borrowers need not pay any down payment, and this condition applies to all US states, including Texas. Therefore, if you are a Texan, and looking to buy a farmhouse as your primary residence, USDA loans might be just what the doctor prescribed. Eligible applicants can get up to 100% financing, and also save a substantial amount on the upfront fees². It also helps broaden the range of homes that borrowers may consider buying, as there no burden of paying a large down payment.

3.   Lower Interest Rate

The USDA guarantees these loans, and this is one of the reasons why most lenders are comfortable lending to the qualified applicants. In addition, lenders also offer competitive interest rates on fixed rate mortgages, which are much lower than conventional loans. Here, it is worth mentioning that the USDA does not offer adjustable-rate mortgages.

4.   Low Credit Score Requirement

Unlike other loans that have stringent credit requirements, the USDA loans have a more lenient credit score requirement, which is 640. Even individuals with poor credit history are eligible to apply for these loans. As stated before that lenders are comfortable lending to such borrowers because the loans are backed by the USDA. Borrowers with low credit scores, however, need to fulfill other criteria to be eligible for this loan.

5.   Includes Closing Costs

Another reason why USDA loans are popular among the rural population in the US, is that any closing costs that borrowers may incur can be rolled into the loan amount for an almost $0 move-in cost³. This allows borrowers to save thousands of dollars, and use the savings to offset other expenses associated with the purchase.

¹For qualified borrowers only. Program is based on USDA/Rural housing requirements, available only in eligible areas and has income limits. ²$200,000 sales price would at 4.375% interest rate (5.133 APR) with a PITI payment of approximately $1658. Products and Rate/APR’s subject to change based upon a number of factors including changing market conditions, your credit rating, size of down payment and amount of documentation provided. Other restrictions apply. Rate and annual percentage rate (APR) calculated on a 365 day year with typical/normal closings costs. ³USDA guidelines allow the rolling in of closing costs and prepaids up to the appraised value.