A USDA home loan is a specific type of loan given to individuals and families who would prefer to live away from the hustle and bustle of the major cities. To stimulate the growth of rural areas, the US government has created attractive incentives (e.g., no down payment, flexible credit requirements, extremely low interest rates, etc.) for those who are willing to strike out on a different path. This loan is not only forgiving to its applicants, it may also be the key to breathing new life back into the more forgotten towns of the nation.
To get a USDA loan, applicants are judged based on their overall merits rather than entirely relying on the numbers. The US government backs the loan and sets many of the application guidelines, unlike other conventional mortgages, but ultimately the lender fills in the rest of the details for each applicant. Those with a credit score of at least 640 or higher will receive a fast-tracked status, meaning their loans will be processed faster and with fewer questions by the lender, but most applicants will be considered even if they have lower scores.
There is no need for a traditional down payment on a home loan, though those who put down less than 20% will need to pay at least 1% of the loan to the lender upfront. Applicants will also pay an annual .35% fee every year for the lifetime of the loan. Interest rates can be as low as 1% for a USDA loan, which is music to practically every home buyer's ears. In addition, the definition of rural and suburban can be blurry today, which is why it doesn't hurt for applicants to check if their dream home is eligible before presuming it's not 'rural' enough.
Picking a Lender
The government does everything in its power to attract hard workers and young families out to small communities, but the lender ultimately sets their own interest rates and fees. So despite all the perks of the USDA loan, it's still necessary for buyers to contact several lenders before making their final decision. Buyers are encouraged to look past the interest rates to the potential fees the lender will charge applicants. Some charges are not nearly as official as they seem and are instead a way for the lender to protect themselves in the case of default. (Even though the loan is backed by the government, the lender still takes risk of losing money if the buyer is unable to afford their payments.)
Priorities and Income
USDA home loans are given out based on need, which means that a person who is financially struggling will be more likely to get a home than a financially stable person. The USDA guidelines also state that people buying in expensive markets be given more leeway in terms of their debt-to-income ratio. So a person applying for a loan in an expensive state like Hawaii will be able to borrow more in relation to their gross income. Closing costs will still be between 1 – 3% of the purchase price of the Old Hickory home.
The USDA loan is attempting to make it as easy as possible to create a win-win for everyone. Struggling home buyers can get a loan, forgotten communities get a boost in population and attention, and older homes can both house families and receive the updates they may not have otherwise had. It's a truly remarkable program that just takes a little effort on the part of the home buyer to enjoy.