Not everyone is financially privileged to afford massive upfront investments, followed by significant monthly expenses when buying a home. Some give up on their dream of owning a home as they think the mortgage loan is not something they can afford to repay.
If you are one of them and about to give up on your dreams as well, there is still light at the end of the tunnel. Among the different types of mortgages, you have USDA mortgages.
The United State Department of Agriculture (USDA) loan is a way to ensure affordable housing for low-to-moderate-income families. This can be the perfect loan for you if you are looking for a house in rural and suburban areas throughout different states.
To make things interesting and give you a better understanding of the USDA loan, it has two types of home loans.
People who are of low income and require a small loan can go for a direct USDA loan.
The more conventional loan that approved USDA lenders offer. That is the USDA loan type that we will discuss.
Now that you have understood what USDA mortgages are all about, you would want to know, Is this loan for me?
To answer your question, let's discuss some USDA mortgage pros and cons. This will help us decide whether to go for this loan or check out other mortgage options.
Among the initial expenses, a down payment is significant, which can be anything from 2% to 20% of your home value. That can be an extremely high amount for low-medium income individuals. USDA mortgage solves this worry.
You have the chance to get 100% financing with No down payment. This is the only type of mortgage where no down payment is required.
It may sound fishy as you would be thinking, How can the lender take such a risk?
The reason: all loans are federal government insured to facilitate the lender in case of a default.
That is why after the lender, the federal government makes the final decision to approve or reject loan requests.
We have seen that not paying a 20% down payment will mean you need to have private mortgage insurance. This increases your upfront and monthly expenses.
Confused about why we are discussing this in the advantages of the USDA loan. Because even though you can get the USDA mortgage loan approved without a down payment, the insurance rates are significantly lower.
You can save a lot of money by decreasing your monthly expenses.
The interest rates on loans are primarily because lenders are worried that you will default on your loan. But since the U.S. government backs the USDA mortgage, it reduces the lender's risk and allows them to offer lower mortgage interest rates.
Hopeful homeowners give up on their dreams of buying a home because their credit history is not good enough. If you are facing these negative thoughts, USDA mortgages can be the perfect option for you.
Again, since the lender are less worried about you returning the loan (because the U.S. government backs it), the qualification criteria are not too strict. Even an average credit history can be good enough to approve your loan.
There are mortgages where if you pay off your loan early, you will need to pay a penalty. USDA mortgage frees you of such bounds and allows you to make advance payments and ease your budget of debt.
So, if you generate extra income, you can make a higher monthly mortgage payment for owning greater home equity.
Qualification criteria can be considered one of the USDA loan pros and cons as well. How? We have already talked about how USDA loan has an easy qualification in terms of credit history. But there is a bigger complication with USDA mortgages.
As the loan is for people having a low-to-medium income, exceeding that limit may not allow you to qualify for the mortgage. There are different limits for various states around the U.S., which are constantly changing.
Consider consulting a real estate or finance professional to understand the USDA limit of your area.
Not having to pay the down payment is an advantage of a USDA loan. But you will still have to bear an annual guarantee fee. This is usually 1% of your total property value. That adds to the investment you need to make in order to get the loan.
Will it be too much to pay in a lump sum? Here's good news for you. You don't need to pay it at the deal closing. You have the option to pay it in installments alongside your monthly mortgage payments.
In addition to the guarantee fee, you also have a monthly recurring USDA program fee, which can change over time. By 2023, the fee will be 0.35% of your USDA loan amount.
As it has been a consistent theme with USDA loans, this mortgage is for low-and-medium income individuals. So, you cannot use this to fund luxuries like vacation homes, multi-family homes, or other non-residential property.
The real estate for which you apply for a USDA mortgage needs to be your primary property, where you live in.
There are USDA lenders who shortlist USDA loan applications. But can't approve or reject a mortgage application.
USDA takes the final call if they want to approve the loan application or reject it. This can be a time taking process as it needs to go through a lot of formalities. Most of the other mortgages take lesser time.
There might be locations that you consider to be rural or suburban. But what does the USDA think? There are specified areas where you can own a home with a USDA loan. This can stop you from gaining financing for properties that you like.
As a general rule, it is hard to approve a USDA mortgage for properties in populated areas because they are usually considered urban areas.
The USDA mortgages can be the go-to mortgage option for lower-income individuals. Now that you know the USDA loan pros and cons, you can choose whether this is the mortgage type that will reduce your headaches.
If you have decided to go for the USDA mortgage and found a lender, the next thing you need is to find a real estate agent and find a home. That is where HAR can assist you.
We have experienced real estate agents to help you on your journey to find your desired home.
Will the Annual Guarantee Fee Stay Throughout the Loan Repayment?
Yes. Unlike other mortgages and fees, the annual guarantee fee of a USDA mortgage will be a consistent expense till you have paid off the loan.
How Long Does USDA Mortgage Takes to Get Approved?
The processing time for your USDA mortgage request may vary. Roughly, the process takes around 30-45 days to complete. After the USDA has scanned your application, you will either get the loan or hear back from them with a rejection message.
Can I Switch From USDA Mortgage?
Yes. Once you own enough home equity, you can refinance your USDA mortgage and apply for a new mortgage like a conventional, FHA, or VA loan.
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