Many prospective first-time homebuyers fear that the dream of homeownership is out of reach. Certain factors, such as lack of down payment, poor credit, or low income may seem like insurmountable barriers to people looking to enter the housing market for the first time. USDA loans were designed to assist low-to-moderate income buyers in achieving homeownership.
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One of the many benefits of USDA loans is that they require no money down. Rising housing prices, student loan debt, and other expenses make saving even 5% down for a home purchase a particularly daunting feat. In fact, lack of a down payment is a frequent reason many otherwise creditworthy individuals with steady income are unable to purchase a home.
Another key benefit of USDA loans are the low fees associated with the mortgage. PMI is particularly costly on other low down payment mortgage programs. PMI on traditional mortgages can cost up to 1% of the mortgage amount annually. With a USDA loan, the borrower only has to pay 0.35% of the mortgage amount annually.
USDA loans also have very low interest rates, even for borrowers with less than excellent credit histories. What's more, borrowers can be approved for a USDA loan with automated underwriting with just a 640 credit score. Borrowers with less than a 640 credit score can still qualify with manual underwriting and there is no minimum credit score needed to qualify.
Borrowers who have experienced a foreclosure or Chapter 7 bankruptcy can still obtain a USDA mortgage after three years, and borrowers who have had a Chapter 13 bankruptcy can qualify after just 12 months of timely payments under the terms of their payment plan. Borrowers who do not qualify even with the relaxed credit guidelines can still obtain a USDA loan with a qualified co-borrower.
Contrary to popular assumptions, USDA loans are available to a large percentage of Americans. Some fear that they may make too much money to qualify for the program. However, eligibility for USDA loans is available to anyone who makes up to 115% of the median income of the area in which you wish to purchase a home, so you hardly have to be destitute in order to qualify. These borrowers are eligible for USDA Guaranteed Loans, which are similar to FHA loans in their administration.
Borrowers who make between 50 to 80% of the median income in their area qualify for USDA Direct Loans. Direct loans are advantageous because they give eligible borrowers the option of extending the term of the mortgage to 38 years for more affordable monthly payments.
USDA loans are restricted to areas the USDA considers to be "rural," discouraging some homebuyers in more urban areas from researching the program further.
However, the definition of the term "rural" is actually much more expansive than the common usage of the term and includes many communities with populations of up to 35,000 residents. Thus, many qualified homebuyers who wish to live in suburban areas may be able to utilize a USDA loan. The USDA maintains an interactive, online map where you easily can check if a home in a certain area qualifies under the program. It is estimated that homes in 97% of the nation are eligible for the USDA mortgage program.
If the home is considered to be in a rural area, then there are not many other restrictions on eligible properties. The home must be used as a primary residence and must be structurally sound pursuant to USDA guidelines, which are requirements that virtually all mortgage banks place on properties purchased under low down payment programs for low-to-moderate-income borrowers.
USDA loans are a unique and particularly advantageous mortgage option for qualified borrowers. Contact us today if you are interested in finding out more about USDA mortgages.
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