USDA Loan Pros and Cons
USDA loans are becoming increasingly well known and sought after as people learn about the benefits of these great mortgages. While they certainly do have their advantages, it is important to be scrupulous and make sure you understand that there are also a few disadvantages to USDA loans. We sincerely hope that you find this information useful in determining if a USDA mortgage is right for you.
Advantages of USDA Loans:
- 100% Financing / No Money Down – Certainly the most notable advantages is that you do not need to place a down payment in order to be eligible for a USDA home loan.
- No Assets Required – You do not need to have any certain amount of savings or assets to qualify for a USDA mortgage.
- Lower Rates – Compared to other major loan types, such as FHA and conventional loans, USDA interest rates are lower.
- Can Qualify with Low Income. Not only can you qualify for a USDA loan with low or very low income, this is the type of borrower that USDA loans are meant for.
- Available Even if Previously Rejected – If you have been turned down for other mortgages, you still may get approved for a USDA loan. Many people who have been turned down for all other mortgages can still get financing through the USDA.
- Seller Paid Closing Costs – this means you could potentially buy a home with no money out of pocket.
- Compensating Factors – if you do not meet the precise requirements for certain guidelines such as debt ratios, you may still be able to get an approval based upon having compensating factors, or in other words, “redeeming qualities”.
- No Seasoning Requirements – A home could have been recently financed elsewhere and still be eligible for a purchase loan through the USDA.
- Fixed Interest Rates – a good advantage of USDA loans is that all mortgages are required to have fixed rates. While some may wish they had an option for an adjustable rate mortgage (due to arms having lower rates), it is not needed since USDA rates are already lower. An arm loan can cause an unscrupulous borrowed to face trouble if/when the rate adjusts.
Disadvantages of USDA Loans:
- Two Kinds of Mortgage Insurance – USDA loans require what is called a “guarantee fee”, and acts the same as mortgage insurance. This includes the 1.00 upfront fee and the monthly guarantee fee of 0.50%. However, if you were to compare the amount of USDA guarantee fee to FHA mortgage insurance, it is cheaper.
- Restricted Areas – USDA loans are only available in rural areas. This is only a disadvantage if you are wanting to finance a home in a larger city.
- Needs Two Approvals – Mortgage lenders and the USDA both have to underwrite the loan. This can also cause the processing time to take longer since once your loan is fully processed by
- Income Limitations – a reality of USDA loans is many are not eligible due to income limits. A household can not have more income than that which has been set for the county they want to purchase a home in.
These are the primary pros and cons of USDA guaranteed loans. For many applicants, the advantages far outweigh the disadvantages. The best way to find out if a USDA rural development loan is right for you, is to see if you qualify and what the terms of the mortgage are. You can then compare the loan terms to any other home financing options that may exist to you. Many people will find that a USDA loan is all that they qualify for, which is not bad news considering the benefits of this great home loan program.