What Is a USDA Loan?By Gretchen Wegrich Updated on 1/6/2015
The USDA Rural Development Loan Program was created by the United States Department of Agriculture to serve the rural housing market. USDA loans are insured by the USDA. The program began in 1991 in an effort to increase home ownership in the rural areas, while incentivizing city dwellers to move towards rural areas.
Benefits of a USDA Rural Development Loan
Rural development loans include many advantages, especially for low income first-time homebuyers. USDA will finance 100% of the appraised value plus the 2% Guarantee Fee that can be rolled into the loan. Borrowers will not need a down payment to secure their mortgage. In addition, as a government assistance-based program, these loans include competitively low interest rates below most alternative loan programs.
- No down payment required.
- Closing costs may be gifted, or paid by seller. Most lenders cap seller concessions at 6% of the loan amount.
- Competitively low interest rates.
- Flexible credit requirements - non-traditional credit histories are accepted
- The USDA version of mortgage insurance is called an “annual fee” and it is much lower than what FHA and Conventional loans charge – only 0.4% of the loan balance.
USDA Loan Disadvantages
- The home must be the primary residence
- Borrowers generally cannot own any other real estate property within local commuting distance
- The only available term is 30-Year Fixed Rate.
- Household Income limits apply.
- The property must be located in an eligible rural area. You can see if an area near you is eligible. Accept the disclaimer, input your address or scroll on the active map.
- Loan limits apply.
- Borrowers have to pay a Guarantee Fee of 2% of their loan balance.
USDA Credit Requirements
- 620 is the minimum credit score allowed by many lenders
- Bankruptcy must be 3 years from discharge date for Chapter 7; Chapter 13 requires 12 months of on time payments and permission from the bankruptcy court/trustee.
- Foreclosure must be 3 years from completion date.
- Short sale must be 3 years from the sale date, unless extenuating circumstances and compensating factors can be documented.
- Other credit requirements or conditions can apply.
USDA Loan Refinance Options
The USDA loan does not allow cash-outs, but will allow rate-and term refinancing. Some states even offer an easy streamline refinance program, with no appraisal or income documentation required. The new loan term must be on a 30 year fixed interest rate. To be eligible for a USDA refinance, the borrower must have a history of 12 months of on-time mortgage payments, and a minimum credit score of 620.
About The Author:
Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.
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