The Ultimate Guide to USDA Home Loans

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Are you looking to buy a home? Not able to collect a sizable downpayment? If so, you should consider getting a USDA loan. 

USDA loans are designed for homes in qualified rural areas. If you’re not looking to live in the middle of a city, there’s a very good chance that a USDA loan would accommodate you. 

Interested in learning more about USDA home loans? Then read on. Here’s everything you need to know. 

The Pros of USDA Loans

The pros of USDA loans are many. We’ll discuss the most prominent of these pros below. 

Don’t Require Downpayment

Perhaps the best thing about USDA loans is that they don’t require a downpayment. As such, you can get a USDA loan without any money in the bank. Yes, that means 100% financing. 

This isn’t to say that you have to put $0 down. You are allowed to make a downpayment. But there’s no push for you to do so. 

Come With Low-Interest Rates

Your interest rate will affect how much you have to pay for your mortgage over time. The lower the interest rate, the better. 

Fortunately, USDA loans have exceedingly low-interest rates. In most cases, these rates are fixed over 30 years. However, you can find 15-year loans as well as adjusted rate loans as well. 

For information on current USDA loan interest rates, then check on a mortgage calculator.

Allow for New Builds

USDA loans aren’t just reserved for old homes. They can be used to finance new home builds as well. So, if you’re looking to build in a rural area, a USDA loan would be right up your alley. 

Can Cover Fix-up Costs

Oftentimes, when you purchase a home, it’s in need of certain repairs. But if you don’t have a lot of money saved up, you can have trouble paying for these repairs. 

Fortunately, a USDA loan can be used to cover them. Whether you need to fix up the entire home or just need to make a few updates, a USDA loan can finance it. 

Don’t Require You to Pay Closing Costs Yourself

When you take out a conventional loan, you are often forced to pay closing costs out of your own pocket. This is another obstacle that prevents budding homeowners from becoming actual homeowners. 

Fortunately, USDA loans don’t require this. When you take out a USDA loan, you can opt to have the seller of the home roll the closing costs into the home’s sale. Yes, you’ll have to pay interest on these closing costs over time, but you won’t be forced to cover them all at once. 

Low Credit Eligibility

There is technically no minimum credit score for obtaining a USDA loan. That said, lenders get to decide who they do and don’t lend to. 

It’s not uncommon for lenders to provide USDA loans to borrowers with a credit score as low as 600. Note, though, that a score of 620 or greater gives you the best shot. 

The Cons of USDA

While there are many positive aspects to USDA home loans, there are certainly some negative aspects as well. They include the following. 

Only Available in Certain Areas

USDA loans are reserved specifically for “rural” areas. In other words, they can’t be used to buy homes in cities. 

What you might not realize, however, is that “rural,”, in this case, has a lot of leeways. You don’t need to buy a home 20 minutes from the closest town. In fact, in many cases, you can buy a home that’s within a town’s official limits. 

For more information on the areas that are eligible, take a look at this USDA home eligibility map

Have Maximum Income Limits

Part of USDA home loan eligibility is a maximum limit on income. You must stay below this limit in order to be eligible for a USDA home loan. 

In most parts of the country, for households between 1 and 4 members, the maximum limit is around $90,300. For households of 5 to 8 members, the maximum limit is around $119,200. 

Note, in high-cost-of-living areas, these limits could be even higher. So, be sure to ask your lender if your income is eligible. You might just meet the requirement. 

Only Allow for Single-family Homes

Thinking about buying a duplex or townhouse? Unfortunately, a USDA loan will not accommodate you. USDA loans are reserved specifically for single-family homes.

In addition, the buyer must dwell in the home. In other words, he or she can not rent it out or use it as an investment property, at least not in the short-term. 

Force You to Pay Private Mortgage Insurance

The last con of USDA loans is that they force you to pay private mortgage insurance. This means that you’ll have to pay between 0.5% and 1% of the entire cost of the loan on an annual basis for the entire length of the loan. 

In contrast, when you take out a conventional loan, you only have to pay private mortgage insurance until you’ve paid off 20% of the house’s total cost. So, if you were to put down a 20% downpayment, you wouldn’t have to pay private mortgage insurance on a conventional mortgage at all. 

Where Do You Get a USDA Loan?

You can apply for a USDA loan in a number of places. These loans are sponsored by standard mortgage lenders. So, if you call banks in your area, there’s a good chance that they’ll offer USDA loans as well. 

Another option is to get on Google and type “USDA loan lenders”. This should return a number of different results, leading you to find an option that benefits you. 

USDA Home Loans Could Make You a Homeowner

In this day and age, becoming a homeowner can be difficult. But with the help of USDA home loans, the possibility is right around the corner. Find a lender and discuss your options!

In need of similar information on mortgages and home ownership? Our website has you covered. Check out some of our other articles right now in the Real Estate and Finance sections!