Populations tend to swell in urban areas, where housing options and job opportunities are generally more readily available, and pay rates are considerably higher than in more sparsely populated rural regions. Of course, not every homeowner is interested in living in a big city, or even a small town. Some people prefer the slower pace and the peace and quiet of a rural existence, even if they only live a small distance outside the nearest town or city.
For this type of buyer, there are specialized loan options available through the USDA home loan program. If you’ve never heard of USDA loans and you’re considering purchasing property, it pays to find out more. What are USDA loans, how can they benefit buyers, and who can qualify? Here’s what you need to know.
What are USDA Loans?
This type of loan is offered by the U.S. Department of Agriculture (USDA), and is mainly available to buyers interested in properties in areas of the country that are less densely populated. This may sound fairly vague, but it turns out that about 97% of the landmass in the U.S. meets criteria to qualify for USDA loans. This area of land represents roughly a third of the country’s population, which equates to about 109 million people.
You might be surprised to discover that many of the properties you consider outside of urban centers are likely to qualify for USDA loans. It is a common misconception that these loans are designed for the purchase of agricultural property (i.e. farms with extensive acreage). They’re actually intended for buyers seeking standard, single-family dwellings. Of course, there are other factors at play to qualify for USDA loans, such as income level, but if you qualify, you’ll enjoy extremely favorable terms, most notably 100% financing, which means no down payment on your mortgage loan.
The only other program that tends to offer 0%-down terms is the VA loan program, which is only available to active and former military members. Even FHA loans require 3.5% down payment, and other mortgage loans frequently require more. Why does the USDA offer such terms? The goal behind these attractive loans is stimulating homeownership in communities that don’t feature the same population density as urban areas.
Aside from the obvious advantage of a loan that requires zero down payment, there are other reasons buyers should look into USDA loans. For starters, they are available to both first-time home buyers and those that are buying subsequent or additional properties. There are restrictions on this, however. In order to qualify for a USDA loan for a property, you cannot own another adequate, livable property “reasonably close” to where you plan to purchase a new property.
If you qualify for a USDA loan, you’ll be happy to discover that loans through this program feature some of the lowest interest rates on the market, which is surprising considering the zero down payment terms. However, because of the push to increase homeownership in sparsely populated communities, these loans receive strong government backing to reduce rates and appeal to a wider range of potential homebuyers.
In addition, buyers do not need top tier credit to qualify for USDA mortgage loans. With a score of 640 or higher, buyers can streamline the process, but technically there is no minimum credit score required to apply for this type of loan, and even bankruptcy filings may not preclude eligibility.
Buyers must pay for mortgage insurance, but it’s significantly discounted compared to mortgage insurance premiums for alternatives like FHA loans, as well as private mortgage insurance. USDA loans are available in both 15-year and 30-year fixed-rate options for optimal safety.
There are a couple of potential drawbacks to this type of loan, mainly the qualifications required. Although much of the landmass of the U.S. falls under the guidelines required for this type of loan in terms of population density, buyers may have to search outside of more desirable urban settings, which could potentially entail commuting for work in urban centers. The general rule of thumb is that a city cannot qualify if it has a population of more than 20,000, although there are exceptions for more populous towns that are “rural in character”.
In addition, there are restrictions based on income level and other buyer factors. Buyers cannot earn an income over 115% of a given region’s median income, and your income determines the amount of loan you’re eligible for. This can get tricky if you earn a bit too much or you want a pricier home, especially since buyers with a down payment in excess of 20% are not eligible for USDA financing.
USDA loans are generally reserved for buyers unable to qualify for other types of conventional loans, but before you rule yourself out, it’s best to speak with the professionals at Cardinal Hawaii to find out whether you qualify for USDA loans so you can take advantage of attractive features if you’re eligible.