If you can’t put at least a 3.5% down for a new home, your choices are limited. Thankfully, the United States government offers two programs, including the VA loan and the USDA Rural Development guaranteed loan that may meet your needs. If you aren’t a current or former member of the military, then you’ll be looking at the USDA product. Let’s take a look at the advantages and disadvantages of the USDA guaranteed loan.
Advantages of the USDA Guaranteed Loan
If you are short on cash and long on the desire to own a home, you’ll be glad to learn that the USDA loan was created specifically for low-to-medium income homebuyers. It requires no down payment and the borrower can use gift money to cover closing costs and even accept up to 6 percent of the sales price from the seller in the form of closing cost concessions.
These are pretty compelling reasons to consider USDA guaranteed loan program, but there are other advantages as well:
- The government’s repayment guarantee (should the buyer default) allows lenders to be more generous with interest rate offerings and more lenient credit standards than they would be on a comparable conventional loan.
- There is no pre-payment penalty for a USDA-backed loan.
- The mortgage can also be used to purchase some manufactured homes.
- The USDA guaranteed loan can be used to refinance a home as well.
Disadvantages of the USDA Guaranteed Loan
Because this loan product was created for low to medium homebuyers, it comes with income limitations. In other words, if you make too much money, you may not qualify (see your lender to determine the current limits).
There are also eligibility requirements for the property you hope to purchase. Chief among these is that it must be considered “modest,” without luxury features, such as a swimming pool. The home must also be located in an area designated as “rural” by the USDA.
The USDA defines rural areas as “open countryside, rural towns (places with fewer than 2,500 people).”
And if you hope to use the home as a rental, you won’t qualify for the program—it’s open only to those borrowers who intend on using the home as their primary residence.
Here are a few other “cons” of the USDA Guaranteed Loan program.
- There is an upfront fee of 2.75 percent of the loan amount. But it can be added to the loan so it’s not money you’ll need to pay out-of-pocket.
- There is another fee of 0.50 percent which is similar to mortgage insurance premium (MIP) for FHA loans or private mortgage insurance (PMI) on conventional loans. And the bad news is that this fee remains in place for the life of the loan and is paid annually. So, for a $230,000 home loan, this amounts to an additional $1,150 per year … almost $100 extra per month.
- Both the lender and the USDA subject the loan to underwriting so expect closing to take a few weeks longer than other loans.
There is more to know about this program and we aren’t lenders but we are happy to put you in touch with the appropriate professional.
Read more – The Best Loan You’ve Never Heard Of – Money Magazine article
The above post “The Pros and Cons of the USDA Guaranteed Loan” was provided by Kevin Guerrero of Keller Williams Clients’ Choice Realty. To find out more about Kevin and Keller Williams check out the ABOUT US page. To get a complimentary home valuation click HERE.
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