United States Department of Agriculture (USDA)

Advantages of USDA Home Loans

 

Zero Down (100% Financing)

Hands down, the most important feature of the USDA loan is that it requires zero down. It allows for 100% financing of an eligible home’s purchase price. FHA loans require a minimum 3.5% down payment, adding thousands to upfront expenses. The no-money-down feature has allowed many people to buy a home who would otherwise be locked out of home ownership.

The USDA Guarantee

The USDA loan is guaranteed by the U.S. government. Guaranteed does not mean that every borrower’s approval is certain. Rather, it means that USDA will reimburse lenders if the borrower defaults on the loan. The USDA backing removes much of the risk from the loan and allows banks and mortgage companies to offer a zero-down loan at incredibly low rates.

The USDA Guarantee Fee

The lender guarantee is partially funded by the USDA mortgage insurance premium, which is 2.0% of the loan amount. The loan also has a 0.50% annual fee, paid monthly. For each $100,000 borrowed, the upfront fee is $2,000 and the monthly premium is $41.67.

The borrower can roll the upfront fee into the loan amount or pay it out-of-pocket. Compared to other loan types like FHA, the USDA mortgage insurance fees are among the lowest.

USDA Home Loan Income Limits

Guaranteed loans are available to “moderate” income earners, which the USDA defines as those earning up to 115% of the area’s median income. For instance, a family of four buying a property in Orange County, California can earn up to $110,750 per year.

The income limits are generous. Typically, moderate earners find they are well within limits for the program. Guaranteed loan income limits can be found on the USDA website.

Low USDA Mortgage Rates

Private banks and mortgage companies offer USDA loans at very low rates. The USDA backs these loans, making it safer and cheaper for private banks and mortgage companies to lend. The savings are passed on to the home buyer in the form of lower rates.

USDA loan rates are often lower than those available for conventional and FHA loans. Home buyers who choose USDA often end up with lower monthly payments considering higher mortgage insurance fees associated with other loan types.

Closing Cost Options

USDA loans allow the seller to pay for the buyer’s closing costs, up to 3% of the sales price. Borrowers can also use gift funds from family members or qualifying non-profit agencies to offset closing costs when they supply this a USDA gift letter signed by the donor.

USDA loans also allow borrowers to open a loan for the full amount of the appraised value, even if it’s more than the purchase price. Borrowers can use the excess funds for closing costs.  For example, a home’s price is $100,000 but it appraises for $105,000. The borrower could open a loan for $105,000 and use the extra funds to finance closing costs.