The U.S. Department of Agriculture (USDA) has a full plate. After all, it doesn’t just deal with farming. This government agency is charged with developing and executing federal policies involving agriculture and agribusiness, food and nutrition, forestry, and rural economic development. The USDA loan program is one example of its commitment to rural economic development, and it is one that can offer prospective homeowners real advantages. What are the pros and cons of USDA loans?
Exploring the Pros and Cons of USDA Loans
Before diving into the pros and cons of USDA loans, borrowers should understand that the USDA defines rural a little differently than most people do. Because of this, many borrowers dismiss this loan option and miss out on a valuable opportunity.
It’s true that the term rural is traditionally used to describe pastoral scenes and farms and stretches of countryside. However, the USDA uses it to paint a much broader picture when it is discussing eligibility for its USDA home loans. Although homes located in city centers and other urban areas won’t qualify, many in suburban and rural areas will. How can you find out if homes where you are planning to buy are eligible for purchase with a USDA loan? A quick visit to the USDA’s Property Eligibility website is all that’s necessary.
Affordable housing and effective economic development go hand in hand. The USDA’s Single Family Housing Guaranteed Loan program is intended to support growth in rural America by helping low- and moderate-income families buy safe, sanitary houses in eligible areas to be their primary residences. The loans are underwritten and issued by private lenders. However, they are guaranteed in part by the USDA. These governmental guarantees reduce the risk for lenders and allow them to be more generous when setting the terms for the home loans. As a result, borrowers are often able to secure mortgage with incredibly favorable terms. Of course, that doesn’t mean that these loans are right for everyone. Weighing the pros and cons of USDA loans is the best way to decide what fits your needs.
The Pros of USDA Loans
What advantages do USDA loans offer? The Mortgage Reports points out several:
- Borrowers can finance 100 percent of their purchase. No down payment is required.
- There’s no mortgage limit. There’s no maximum for USDA loans. The amount a person can borrow is generally determined by their household’s debt-to-income ratio, but exceptions may be made for borrowers with a strong credit history.
- Credit requirements are flexible. The guidelines for approval are very relaxed. In fact, borrowers with credit scores as low as 580 may get approved.
- Interest rates tend to be low. Thanks to the USDA’s backing, USDA loans typically come with very low interest rates.
- Closing costs can be rolled into the loan. Rolling these costs into the loan reduces the amount that you’ll need to come up with before you can buy.
- Closing costs can be gifted. Borrowers can use gifts from family or nonfamily to pay for closing costs. Closing costs can also be paid by the seller.
The Cons of USDA Loans
Nothing is perfect, and a USDA loan is no exception. Millennial Money reports a variety of potential downsides associated with USDA loans that might make a borrower think twice:
- There are income limits. The borrower’s income cannot exceed 115 percent of the median household income in the county where the property is located.
- There are occupancy limits. USDA loans can only be used to purchase a primary residence. Borrowers cannot buy a vacation home or investment property with this financing.
- There are geography limits. The property must be in an eligible area, but a large proportion of the U.S. meets this measure.
- Loan formats are limited. USDA loans are only available as fixed-rate loans with terms of 15 or 30 years. Borrowers using a USDA loan to refinance cannot take cash out.
Are you interested in learning more about USDA loans? Reach out to PrimeLending KC. Our team of loan experts would be happy to help. To get started, give us a call at 844-701-5626 or contact us online.