A USDA rural development loan—also referred to as a USDA or rural loan—is a type of mortgage financing for home buyers specifically located in more sparsely populated areas. Developed and guaranteed by the U.S. Department of Agriculture, they're advantageous for several reasons.
Here are key benefits of USDA rural development loans:
A Down Payment Isn’t Required
Most loans require a minimum down payment. This can range anywhere from 3.5 to 20 percent, depending on the financing option you’re interested in and other factors, such as your employment history, credit score and debt-to-income ratio. However, the USDA doesn’t expect borrowers to pay any money down.
As discussed in an August 2018 article published by financial news source TheStreet.com, this loan is “a zero-down payment loan guarantee program for specific rural areas.”
This likely lifts a weight off of many borrowers’ shoulders, since they don’t have to worry about affording the appropriate down payment to qualify. Such an advantage keeps more money in your pocket for moving costs or other expenses.
Borrower Qualifications Are More Lenient
As aforementioned, there are certain pieces of information about yourself that a mortgage lender will want to review before giving you a loan. With a USDA loan, the qualifications—specifically regarding credit—tend to be more forgiving than other loans. In fact, there isn’t a set credit range applicants need to fall within. Granted you meet all of the other eligibility requirements, such as those involving income and location, there’s still a chance you could be approved even if your credit is on the lower side.
With that said, a higher score is always better than a low one.
Taking the necessary steps to improve your credit rating as much as you can before applying for any type of loan would be in your best interest. Remember, a lender is going to request to review your credit history to assess your ability to pay back the loan, so you want to be as prepared as possible. If you need any assistance, contact a lender to find out more about what impacts your credit score.
Less Money Spent On Mortgage Insurance
USDALoans.com, which is owned by independent technology provider Mortgage Research Center, LLC, explains how the purpose of private mortgage insurance (PMI) is “to protect the lender in the event you default on your loan.” The private educational website continues, “It’s also what allows buyers with lower down payments (or even none at all) to purchase a home despite their lack of savings.”
However, USDA loans don’t have any PMI requirements. “Instead,” USDALoans.com states, “these specialized loans come with both an upfront and annual forms of mortgage insurance. The good news is the costs of USDA mortgage insurance are significantly lower than on other loan products,” such as FHA or conventional loans.
Lower Interest Rates
USDA loans often offer lower rates than other mortgages, which saves borrowers money as they pay back the loan. When you’re not spending as much money in interest, you’ll have more to utilize for other daily expenses or to invest and use at a later date.
*Remember that only certain property types are USDA-eligible.
There are certain criteria a property must meet if you want to obtain a USDA loan, including its location. Luckily, you can easily check via the USDA’s website, which displays a map highlighting applicable areas.
Aside from the home’s location, there are additional requirements to keep in mind. For instance, the property must be used as your primary residence. This means anyone who is looking to purchase a vacation home or investment property would not qualify.
In fact, the USDA states, “The property must not include buildings principally used for income-producing purposes. Barns, silos, commercial greenhouses, or livestock facilities used primarily for the production of agricultural, farming or commercial enterprise are ineligible.” Still, there are some minor exceptions. The government agency adds, “Home-based operations such as childcare, product sales, or craft production that do not require specific commercial real estate features are not restricted.”
The home also needs to “have direct access from a street, road, or driveway” and have the proper utilities, including water, available. It should follow the applicable zoning restrictions, as well.