It’s an understandable mistake. When people learn that the United States Department of Agriculture (USDA) has a home loan program, they tend to assume that it is meant to benefit farmers and others who call agricultural communities home. While the program was launched to help promote prosperity and strengthen communities by supporting rural development, you don’t have to settle in the depths of the countryside to take advantage of it. With eligible properties scattered throughout the country, homebuyers in both rural and suburban areas can enjoy USDA loan benefits and the many advantages that come with this form of financing.
USDA Loan Benefits
As NerdWallet reports, the USDA helped some 127,000 families buy and upgrade their homes in 2017 through its Rural Development program. There’s no question that the organization’s USDA Rural Development Guaranteed Housing Loan played a role in a number of those success stories. Sometimes referred to as a section 502 loan since it was a product of section 502(h) of the Housing Act of 1949, this type of loan is originated by approved lenders according to guidelines set by the USDA. Then, it is guaranteed in part by the USDA. That government-backed guarantee reduces the risk taken by lenders and spurs them to provide the type of terms that are tough for savvy homebuyers to ignore. What are some USDA loan benefits?
No Down Payment Required
For many would-be homeowners, the task of amassing a sizeable down payment is a daunting one. Fortunately, eligible borrowers who opt to utilize a USDA loan to purchase their new home can bypass this challenge. As Zillow explains, a guaranteed loan from the USDA is a chance to secure 100 percent financing, so no down payment is required. Eliminating the demand for a down payment can make homeownership more accessible and allow people to invest in their dream home sooner.
Appealing Interest Rates
Interest is the fee that a lender charges a borrower for the use of their funds, but loaning money isn’t a sure way to make money. In fact, it can be a downright risky proposition. After all, if the borrower defaults, the lender is likely to lose money.
Unfortunately for borrowers, accepting a higher interest rate means paying more in interest, which increases both the monthly mortgage payment and the total cost of the home loan. What does this have to do with USDA loans? As the USDA notes, it provides a 90 percent loan note guarantee to approved lenders who originate USDA loans. This significantly reduces the risk that lenders take when extending these loans, so they are willing to offer borrowers highly competitive interest rates. Ultimately, using a USDA loan may allow borrowers to snag a lower interest rate that makes buying a house more affordable.
Some loan programs come with rigid guidelines that strictly limit how borrowers can use the funds that they receive. However, USDA loans offer a refreshing amount of flexibility. As The Simple Dollar indicates, funds received via a guaranteed USDA loan can be used for a wide range of purposes:
- The purchase of a new or existing residential property to serve as your permanent residence
- The purchase of a site with a new or existing dwelling
- The refinancing of eligible loans
- The payment of reasonable and customary closing costs associated with the property’s purchase
- The payment of reasonable and customary real estate taxes
- The payment of connection fees for utilities
- The funding of repairs and renovations
- The funding of upgrades or renovations needed to make a home accessible for a disabled resident
- The installation of upgrades that increase the energy efficiency of the property
- The installation of upgraded appliances, equipment, or features
- The funding of improvements to the site like grading, seeding, or the installation or repair of hardscaping
Lower Mortgage Insurance Premiums
The USDA home loan program is partially funded by homeowner-paid mortgage insurance premiums. However, these mortgage insurance rates are noticeably lower than those required for comparable conventional or FHA loans. According to The Mortgage Reports, the USDA charges a 1 percent upfront fee at closing for both purchases and refinances. In addition, borrowers must pay an annual fee equal to 0.35 percent of the remaining principal balance. As an added bonus, these fees don’t have to come out of the borrower’s pockets. Instead of charging borrowers upfront for mortgage insurance, the USDA rolls it into the loan so that it can be incorporated into the monthly mortgage payments.
Are you interested in learning more about USDA loan benefits or other forms of financing? Talk to the experts at PrimeLending of Kansas City. We offer the personal attention and forthright guidance you need to feel comfortable and confident as you begin your journey towards homeownership. Contact us today to schedule a consultation.