How Do USDA Loans Work?
How do you figure out if a USDA loan is the right loan for your needs? Exploring how USDA loans work can certainly help. It’s also wise to consider their pros and cons.
Why Are USDA Loans Offered?
The USDA is frank about why it offers guaranteed USDA loans, which are formally known as Section 502 Guaranteed loans. By guaranteeing loans, it reduces the risk for lenders, which allows them to offer home loans with favorable terms to low- and moderate-income households living in rural areas. This builds prosperity and strengthens the community, improving the quality of rural life.
How do USDA loans work? The program gives a 90-percent loan guarantee to approved lenders who extend a loan with 100-percent financing to eligible applicants. In other words, qualified borrowers can get federally backed loans with favorable terms, like no down payment requirements and competitive interest rates from private lenders.
Who Qualifies for a USDA Loan?
A USDA-guaranteed loan isn’t available to just anyone. As NerdWallet explains, borrowers must meet specific eligibility requirements to qualify:
- Citizenship. Borrowers must be U.S. citizens or legal permanent residents.
- Income. Borrowers must have a record of at least 24 months of steady income. However, there are income limits that are determined by the location. Generally, applicants cannot have a household income greater than 115 percent of the median income for their area.
- Debt-to-income (DTI) ratio. The monthly mortgage payment must be 29 percent or less of the monthly income. This total includes principal, interest, insurance, and taxes. All other monthly debt payments must not exceed 41 percent of their monthly income. However, slightly higher DTIs may be considered when borrowers have exemplary credit scores.
- Credit history. What if a borrower hasn’t established a credit history yet? It’s not a dealbreaker. Nontraditional credit references will be considered.
- Residency. Borrowers must intend to use the home as their primary residence.
- Geography. The home must be in an appropriate location. Metro areas won’t qualify. Rural areas will. Many suburban areas will also have homes that can be purchased with USDA loans.
What Are the Pros of USDA Loans?
USDA loans have many advantages. Homebuyer.com points out a few highlights:
- 100-percent financing. With USDA loans, you don’t need to wait until you can scrape together a down payment to buy a home. Since 100-percent financing is available, you can become a homeowner sooner.
- Assumability. USDA home loans are assumable, so they can be transferred to future buyers with the same interest rates and terms. That can be a fantastic selling point.
- Repair costs. USDA loans can include funds for allowable repairs.
- Refinancing. With USDA Streamline Refinance, buyers have a great option to improve the terms of their deal if interest rates drop in the future.
What Are the Cons of USDA Loans?
Although USDA-guaranteed loans certainly offer a fantastic opportunity, they aren’t perfect. As U.S. News & World Reports indicates, there are geographic limitations with this loan program. Only properties in rural and suburban locations have the potential to qualify. In addition, there are income limitations for borrowers. Also, the USDA-guaranteed loan has an annual fee, but this charge can often be rolled into the loan amount.
Are you still trying to decide if a USDA loan is a good choice? Are you curious about other home loan options? Reach out to the loan experts at PrimeLending West Texas. We’ll listen carefully to your specific situation so that we can help you choose the loan product that’s the best fit for your needs. Contact us today to get started.