To support small towns and provide opportunities for lower-income families, the Housing Act of 1949 authorized the United States Department of Agriculture (USDA) to support home ownership in rural America by offering USDA home loans.

Here is everything you need to know about USDA home loans.

What Are USDA Rural Development Home Loans?

USDA Rural Development home loans are loans from private lenders that the government backs under Section 502 of the Housing Act. 

The USDA loan program provides two types of assistance: direct payments and loan guarantees.

• Direct payment assistance consists of subsidies that help very low-income homeowners make their monthly loan payments, while guaranteed loans are loans for families with moderate incomes.
• In a guaranteed USDA loan, the government guarantees 90% of the loan’s value if you cannot repay the loan. Guaranteed loans allow lenders to offer low loan interest rates. 

USDA assistance enables people living in rural communities to remain part of those communities if they lack the resources to rent or purchase property through a traditional mortgage.

Who Is Eligible for USDA Home Loans?

To apply for a USDA loan, you must be a US citizen without safe, sanitary, and decent housing and:

• Be able to make monthly loan payments that don’t exceed 29% of your income
• Earn a stable income
• Have acceptable credit.

You can only take out a USDA loan for properties in towns with populations lower than 35,000 people. The USDA website provides a searchable map that indicates which addresses and areas are eligible for USDA loans.

The requirements for USDA direct loans are more stringent than USDA guarantee loans. To be eligible for a USDA direct loan, you must buy a single-family home. The home must be no larger than 2,000 square feet for direct USDA loans.

For guaranteed USDA loans, the home cannot be worth more than a preset limit and cannot have an in-ground swimming pool.

Pros and Cons of a USDA Loan

The USDA loan program helps people with bad credit or low incomes in rural areas afford homes, but these loans aren’t right for everyone. Explore these pros and cons to decide if a USDA loan is right for you.

Pros

• Direct loans include subsidies for payments.
• Lenders offer lower interest rates.
• You do not need private mortgage insurance.
• You can apply Section 502 assistance to outstanding loans subject to the COVID-19 moratorium on loan repayments.
• There is no credit score requirement for USDA loans.

Cons

• The USDA charges an upfront fee of 1% and an annual fee of 0.35%
• The house must be your primary residence.
• You cannot generate income from a house you purchase using a USDA loan.

McGowan Mortgages: Your Mortgage Expert

McGowan Mortgages is a dedicated mortgage lender with a personal approach to home mortgages. We know about USDA home loans and care about helping all our customers in Kansas City, MO, obtain the perfect mortgage. Take the next step toward owning your dream home by calling (816) 631-9687 to request a consultation with a mortgage expert today.

Did you know you can buy a property with no money down? Though it may appear to be too good to be true, the United States Department of Agriculture Guaranteed Rural Development Loan, commonly known as a UDSA or rural development lending, assists potential homebuyers in becoming homeowners by providing various benefits not available via other loan programs.

4 Major Benefits of Getting a USDA Loan

Here are five ways a USDA loan might help you buy a house.

1. No Down Payment Required. The fact that the USDA loan program allows homebuyers to achieve 100 percent financing is undoubtedly the greatest benefit of using a USDA loan. This alleviates the biggest hurdle most first-time buyers face which is gathering enough funds for a down payment. In comparison, borrowers are required to supply a minimum 3.5 percent down payment for an FHA loan and 3 or 5 percent for a conventional loan.
2. Borrower Qualifications. Most traditional lenders want at least a 640 credit score, but you’ll need something closer to 720 to qualify for the lowest interest rates. There is no minimum credit score for USDA loans, however, you must have a score of 640 or above to use the USDA’s automated underwriting system.
3. Private Mortgage Insurance (PMI) with a Low Monthly Payment. Private mortgage insurance is needed for any loan with a loan-to-value of less than 80%, regardless of the lending program. So, if a borrower takes advantage of the USDA loan’s no-down-payment option, they must pay monthly mortgage insurance. The USDA loan has the lowest private mortgage insurance rate of any lending program, and it does not change depending on your down payment, as it does with conventional financing. The USDA loan’s yearly PMI cost is now 0.35 percent of the loan’s remaining principal amount.
4. No Prepayment Penalties. In addition to the low-down-payment and low-interest rate perks of USDA home loans, the loan also has no prepayment penalties, allowing borrowers to take advantage of interest rate changes, home price fluctuations, and other changes without facing fees.

The Bottom Line

Homeowners who might be looking to sell their home in the near future can take advantage of the USDA loan program’s no prepayment penalties. This is a program many consumers should consider, especially first-time homebuyers who lack the funds necessary to make a down payment.

Contact McGowan Mortgages Today!

Are you searching for home loans in Kansas City or beyond? McGowan Mortgages’ home loan specialists ensure that your investment, home purchase, or refinancing experience in Missouri and beyond is exceptional. Call us today at (816) 631-9687.