If you can’t pay cash for your new home you’ll need a mortgage and, if you’re not in the market for a luxury home, you’ll need a mortgage created for those with a more modest income.
Thankfully, the United States government offers several programs, including the VA loan, the FHA-backed loan and USDA rural housing loan. If you aren’t a current or former member of the military, you’ll have only the FHA and USDA (rural housing loan) products to choose from if you want a government-guaranteed loan. While both products have advantages and disadvantages, let’s take a look at those of the USDA guaranteed loan.
Advantages of a USDA Rural Housing Loan
If you are short on cash and long on the desire to own a home, you’ll be glad to learn that USDA rural housing loans were 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, of course, compelling reasons to consider using the USDA rural housing 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 with 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.
- A USDA rural housing loan can be used to refinance a home as well.
Disadvantages of a USDA Rural Housing Loan
Taking the bad with the good may be the name of the game if you’re interested in participating in this zero-down loan program, so let’s get to the “cons” of USDA rural housing loans.
While the fact that you must earn a low-to-moderate income to qualify for the USDA rural housing loan program may be considered an advantage, it becomes a disadvantage if you earn over the maximum allowable income (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).” You’ll find homes in Montgomery, Chester, and Berks Counties that meet the eligibility requirements of the USDA rural housing loan program.
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 living in the home.
Here are a few other “cons” of the USDA rural housing loan program.
- There is an upfront fee of 2.75 percent of the loan amount. Now, there is a bright side to this – it will be added to the loan so it’s not money you’ll need to pay out-of-pocket at time of settlement.
- There is another fee, amounting to 0.50 percent, that is similar to the mortgage insurance premium for FHA loans or private mortgage insurance on conventional loans. This fee stays in force for the life of the loan and is paid annually.
- Both the lender and the USDA subjects 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. Just reach out to us and we’ll do our best to help.
The author, Rick Sheppard, is a licensed real estate broker with RE/MAX Achievers, Inc in Pennsylvania and a 32+ year veteran of the real estate trenches. He knows a lot because he’s seen a lot. If you have any questions about this or any real estate related topic, feel free to contact Rick at [email protected] and he’ll do his best to answer your questions.