The Fred Adams Group of RE/MAX Integrity
A USDA loan can represent an overlooked opportunity for homebuyers, and there are a lot of myths surrounding this particular type of loan that keeps people from exploring their options. USDA loans are from the United States Department of Agriculture and have enormous benefits.
These loans don’t require a down payment for one. They also tend to have more favorable interest rates when compared to conventional loans or other government loans, and in the current environment, that’s reason enough on its own to look into purchasing a home with this type of loan. USDA loans have reduced mortgage insurance, which is called the USDA Guarantee Fee, and you might qualify with credit scores as low as 640.
So why don’t people use this loan more often or at least consider it?
In 2020 only 137,000 people used a USDA loan benefit, and below, we break down some of the myths and reasons why they’re underutilized.
First, USDA loans aren’t just for farms, but more than that, they aren’t exclusively for rural properties. USDA loans were initially designed to help with the development of farms and rural locations, but that’s not automatically the case anymore. Around 97% of all the land in the U.S. is available for financing with a USDA loan. Many buyers who use this type of loan live in the suburbs, and tens of millions of people are eligible for this type of financing.
The USDA doesn’t focus only on the location of a property when they’re determining eligibility. Instead, they look at the population of a town. The definition of what rural is, is much broader to the USDA than most people realize.
As well as not only having to live far away from cities or towns in the country to use this loan, you can also use them for most types of property, including townhouses, condos, and modular and manufactured homes.
Another myth that floats around about a USDA loan is that you have to be a first-time buyer to qualify, which is, again, not the case. There are income and property limits to apply for this type of loan, but it doesn’t matter if you’ve already bought a home in the past or not. The limitation is that you can’t use these loans for investment properties though—you have to use it for a home that will be your main residence.
You can use a USDA loan to buy a home, of course, but you can also use the loans to refinance or do renovations to your current home. The USDA Renovation Loan has 100% financing as an option.
Another myth that tends to hold people back from USDA home financing is that they believe since there’s no required down payment, the mortgage insurance on these loans will be higher. USDA loans have the option to put as little as 0% down, but they also have very low insurance costs compared to an FHA loan.
Finally, another myth is that you have no options for negotiating your loan terms with USDA financing. There are two types of USDA loans. The USDA direct loan is for low-income borrowers, and these are funded directly by the USDA. The terms of these loans are not negotiable.
There are USDA-guaranteed loans, however, offered directly through approved lenders. These have terms that are negotiable. The lender and borrower negotiate the interest rate, just like is the case with a conventional loan, based on the borrower’s credit score, employment, and financial situation.
You shop around with USDA loans because the lenders are going to have very different offerings from one another in many cases, just like is true with conventional home loans and lenders.
