The prospect of buying a house in the suburbs with a home loan from the U.S. Department of Agriculture (USDA)’s Rural Development program may seem a bit odd, but don’t dismiss it out of hand. The USDA’s generous definition of rural means that aspiring homeowners in a surprisingly large portion of the country have the option of using this form of financing. What should you know about the pros and cons of USDA loans?
The Pros and Cons of USDA Loans
As Interest.com reports, guaranteed loans from the USDA work much like VA loans. If you hope to use this type of loan, you simply need to find a private lender who offers them and put in an application. If your application is successful, the lender will provide the actual financing.
What role does the USDA play? In addition to lending its name to the loan and setting the basic guidelines for the loan program, the USDA stands behind each of the loans with a partial guarantee. Because this government-backed promise makes providing these loans less risky, many lenders are willing to provide USDA loans with the favorable terms that make them so popular with borrowers.
However, nothing is perfect. There are also some downsides associated with these loans. What are the pros and cons of USDA loans?
The Pros of USDA Loans
As Business Insider points out, USDA loans can deliver some very attractive advantages:
- There are no loan limits. The amount you can borrow is determined by your finances.
- No down payment is needed. If you don’t have a lot saved, being able to secure 100-percent financing can be the difference between dreaming about buying a home and actually doing it.
- USDA loans come with lower interest rates. Typically, USDA loans offer lower interest rates than conventional loans. In fact, they also tend to beat out the rates provided by other government-sponsored mortgages, including VA and FHA loans.
- Insurance costs are low with USDA loans. While you are required to pay for mortgage insurance, the USDA version is lower than what you’d pay for many other loans. Expect to pay an amount equal to 1 percent of your principal at closing. After that, you’ll need to pay an annual premium equal to 0.35 percent of your remaining principal.
- Refinancing into a USDA loan is an option. In the future, changing conditions may prompt you to refinance to secure a lower payment or better interest rate. With a USDA loan, you can refinance into another USDA loan.
The Cons of USDA Loans
USDA loans certainly have appealing perks. However, as The Mortgage Reports notes, there are some potential drawbacks associated with this form of financing that borrowers need to be aware of before they decide to use it:
- There are income limits. Borrowers can earn no more than 115 percent of the median income for their county or area.
- There are geographic limits. An estimated 97 percent of the land area of the U.S. is eligible for a USDA loan. Many rural and suburban homes will make the cut, but homes close to urban centers may not be considered rural enough.
- There are rules about occupancy. USDA loans can only be used to purchase a home that you plan to occupy. While you don’t have to be a first-time homebuyer, you cannot own other adequate property within a reasonable distance of the home that you’re buying with the USDA loan.
- Only single-family homes are allowed. You cannot use a USDA loan to fund the purchase of a multi-unit property.
- You cannot choose an adjustable-rate loan. All USDA loans are fixed-rate loans.
Could a USDA loan be the right option for you? Are there other pros and cons of USDA loans that you should be aware of? Is there some other loan product that might be a better fit for your unique needs? Ask the loan experts at PrimeLending of Denver, Colorado. We would be delighted to talk with you about your housing goals and how we can help you sharpen your strategy for reaching them. To discover more about our services and how they can benefit you, contact us today.