What Are the Benefits of a USDA Loan for Homebuyers?

The USDA isn’t just for food pyramids and grading beef—it’s also for home loans! The U.S. Department of Agriculture’s (USDA) mortgage program was created for homebuyers who wish to live in rural and suburban areas. In fact, over 3.4 million families over the past 65 years have purchased a home with a USDA loan.

With multiple loan options, you might wonder: What are the benefits of a USDA loan?

In general:

1. It’s better for rural communities: The USDA is committed to providing affordable homeownership opportunities. It helps create more prosperous, thriving communities and improves the quality of life in non-urban areas.

2. It’s cost-effective for home buyers: No down payment is required, and mortgage rates are often lower than conventional mortgages.

RELATED: Is living in the country or the city better?

Plus, what kind of borrowers and properties are eligible for USDA loans?

Borrowers of USDA Guaranteed Loans must not exceed a set income limit based on state, county, and household size, outlined in this map and table for rural development. USDA loan applicants must also:

• Plan to occupy the primary residence

• Be a U.S. citizen or permanent resident

• Provide proof of dependable income

• Have a credit score of 640+ (or show the ability to repay debts)

• Be able to pay a monthly mortgage that is no more than 29% of monthly income

• Have monthly debt payments (including mortgage) that do not exceed 41% of the borrower’s income
  
  

Properties eligible for USDA Guaranteed Loans can be searched on this eligibility map from the USDA website.

After determining whether you and the property are eligible for a USDA loan, you can look more in-depth at each of the benefits of USDA loans.

USDA Loan Benefit #1: No Down Payment Required

Unlike most other loans, USDA Guaranteed Loans do not require a down payment. This common (and huge) barrier to homeownership is eliminated with the option of USDA loans. With no down payment required, residents who wish to be homeowners can suddenly access their own piece of the American dream with little upfront cost.

In comparison, most conventional loans require a down payment of 3-20%. For example, a $400,000 home would require $12,000 at minimum, (or $80,000 in order to avoid paying private mortgage fees). But that’s all for a conventional loan, not a USDA loan.

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USDA Loan Benefit #2: Competitive Interest Rates

USDA loans offer lower, more competitive interest rates. Because the loans are government backed, it’s less risky for lenders. Therefore, interest rates can be lower than conventional loans by 0.5-0.75% lower or more. It’s not dependent on your credit score, and it’s not dependent on your (non-required) down payment, either. Since the interest rate will likely be lower, your regular monthly payments will also be lower, and you’ll save on interest over the life of your loan, as well.

USDA Loan Benefit #3: More Flexible Borrower Qualifications

Even if you have a credit score that’s lower, you may still be eligible to take out a USDA loan. Most lenders require a credit score of 640 or better, but if you have below-average credit, the lenders for a USDA loan may be more lenient—especially if you have other ways to show your fiscal responsibility.

USDA Loan Benefit #4: Lower Mortgage Insurance Costs

As mentioned above, private mortgage insurance is required for conventional loans if the down payment is less than 20%. However, with USDA loans, no down payment is required, and no mortgage insurance is required either.

However, every USDA loan has guarantee fees that are applied annually as well as upfront, which function in a similar way to mortgage insurance. The upfront fee is a small percentage (around 1%) of your loan’s value and is part of your closing costs. It may be rolled into your total mortgage costs if your lender allows. The annual fee ( .35% of your loan value) is added to your monthly payments for the life of your loan.

For comparison, FHA and conventional loans often have private mortgage insurance costs that range from 0.10-1.5% or higher of the loan amount per year.

USDA Loan Benefit #5: Finance Repairs and Improvements

Using the USDA loan program, you can repair your home, make improvements, add accessibility features, and install energy-efficient materials like roofing, windows, and solar panels. Per the USDA website, “Eligible applicants may purchase, build, rehabilitate, improve or relocate a dwelling in an eligible rural area with 100% financing.” For buyers purchasing older homes, this offers some added flexibility to create a home that will work well for them and their families. Specifically, the USDA Rural Development Guaranteed Housing Loan Program can cover the costs of typical renovations and updates often necessary for those in low- to very-low-income brackets to attain decent, safe, and sanitary housing.

RELATED: USDA will now finance existing manufactured homes

USDA Loan Benefit #6: Sellers May Contribute to Closing Costs

Closing costs can be a large sum of money for buyers, ranging from 3-5% of the home’s cost. However, with a USDA home loan, the seller can contribute to the closing costs and make other concessions. Motivated sellers may be willing to part with these sums to get the house off of the market more quickly and sold more easily. For reference, conventional loan home buyers may get up to 9% (depending on the loan to value ratio) of closing costs covered by the seller, but they must first be able to put down a payment of 20%—something that no USDA loan home buyer would ever need to do.

All in all, a USDA home loan could be the solution for the home of your rural dreams. Research USDA loans and whether you, as a borrower, and your ideal property are eligible for these cost-effective, government-backed loans. Contact us at PacRes Mortgage to get more information on USDA loans, whether it’s the right choice, and whether you’ll qualify!