7 Must-know Facts about USDA Rural Development Loans

The United States Department of Agriculture (USDA) runs rural development

programs aimed at improving the economic situation as well as the quality of life of

the rural population with moderate, low and very low incomes. Some of the facilities

it offers are direct home loans and mortgage guarantees, housing rehabilitation,

rental assistance, aid to developers of assisted living facilities for the elderly and

disabled, and community facilities such as child care, schools, and libraries. Here are

some facts related to USDA loans.

1. No Private Mortgage Insurance (PMI)

The USDA waives off the conventional Private Mortgage Insurance (PMI) that applies

to most other home loans. But they do charge an annual fee of 0.5% of the remaining

loan amount, paid over 12 months. So, the amount decreases significantly every year

as the borrowers pay back their mortgage. In addition to this, a one-time upfront fee

is also taken, as an assurance to the lender to cover for losses in case the borrower

defaults. However, even when added up, the amount is much lower than the PMI

charged by other lenders.

2. Restricted Borrower Policy

One of the advantages that lowered income groups face with the USDA loans is that

it is not restricted to only first time borrowers. But a qualified borrower cannot own

another home while still on an USDA mortgage loan. However, as long as they can

close one mortgage, they can apply for a second loan.

3. Zero Down Payment Option

Conventional loan lenders usually take 5% as the down payment, while the FHA loan

borrowers pay just 3.5%. The USDA wants to encourage rural development in

lowered income states like Alabama, Texas or West Virginia, and hence offers a zero

down payment option to its borrowers.

4. Income Group Limitation

This is probably the most stringent rule that the USDA diligently follows. The USDA

aims at rehabilitating people who fall in the lowered income group. The bottom line

is that in order to qualify for the loan, the borrower’s income cannot cross 115% of

the median area income.

5. Lower Credit Score Requirement

Usually, lenders look for borrowers with a credit score in the range of 720-740 that

can even go up to 800. But the USDA relaxes this a little, to 640 and above for a

borrower to qualify for a loan.

6. Reduced Closing Costs

Closing costs will vary from vendor to vendor and from location to location. For

example, in the state of Texas, the USDA rural development fee is not more than 6%

of the selling price. But usually, these costs can be claimed under the loan amount,

making it an almost zero cost to move in, which helps the borrowers save thousands

of dollars. Alternatively, borrowers can utilize any gift funds from family or friends to

pay these costs.

7. No Maximum Loan Limit

The USDA does not set a cap on the upper limit of the amount that can be borrowed.

However, the borrower needs to meet the credit score and debt-to-income (DTI)

ratios, as well as have an income that is lesser than 115% of the median area income.

The catch however is that, as the amount borrowed increases, so will the monthly

installment payments, which would mean that the borrower’s income must increase

to be able to afford it. If that happens, they may not qualify for the USDA loan

program anymore.

Last Few Words

With relaxed requirements, and an easy mortgage option, the USDA aims at rural

development in states with a higher concentration of lower income population, like

Texas, Utah and Idaho amongst others. It is an ideal option for people to own their

own homes, and also serves as an encouragement to developers to build the

community, which leads to rural development and welfare.