The US Department of Agriculture is making some changes to its Single Family Housing Guaranteed Loan Program (also known as a USDA loan) effective October 16, 2016. These changes can mean big benefits for anyone considering a home purchase in a rural area in the coming year.
A USDA mortgage allows for a minimal cost of entry in order to make homeownership affordable and attractive in rural areas. However, many areas just outside of urban areas can qualify for a USDA loan. According to TheMortgageReports.com, geographically-speaking, about 97% of the US is eligible for a USDA loan. There are caps on the total value of the home as well as household income limits. Both of these caps will vary by area. In general, a minimum credit score of 640 is required.
The USDA loan provides a loan up to 100% of the home value with an upfront loan guarantee fee and an annual guarantee fee (which is paid monthly). That means that no down payment is required for a USDA loan, a barrier for many would-be homeowners. However, there is a fee for this convenience: both a one-time, upfront fee and an annual fee (reflected as monthly mortgage insurance):
Up Front Lending Fee – this is dropping from 2.75% to 1.0%. On a $300,000 loan, this would now add $3,000 to the loan amount (down from $8,250).
Annual Fee – The annual fee, paid monthly, will be .35% of the average scheduled unpaid principal balance, down from .5% this last year. For an unpaid average balance of $250,000, the amount saved per month will be a bit more than $30 under the new parameters.
These fees are actually less than an FHA-backed loan (which require 3.5% down payment) which also requires an Up Front Lending Fee (of 1.75%) and an Annual Premium which is also paid monthly. The Annual Premium for a 30 year loan with 5% down payment (or equity) or less is .85% (based on initial loan-to-value ratio).
Both 15 year and 30 year fixed rate mortgages are available with a USDA loan and the funds can only be used for primary residences.
One thing to note is that the lender may have additional fees to be aware of such as origination fees, fee to pull a credit report, etc. Additionally, there are other closing costs that you will need to budget for as per your lender.
There are a lot of financial benefits to a USDA loan and those benefits are getting better. If you would like to learn more, please contact me at (253) 222-2626 or email firstname.lastname@example.org. I can put you in touch with a lender who can discuss all the ins and outs of this program with you and help you determine if this program meets your needs.