Updated January 2018
Can USDA loans be used with down payment assistance programs? That is a question that many people are asking – but you may be surprised to learn that USDA offers 102% financing depending on your situation – so be sure you know what the different terms mean.
The USDA loan is one of the hottest loans with homebuyers today because of the advantages it has over FHA loans. Here is a breakdown of the special advantages of the USDA loan program:
Special Advantages of USDA Rural Home Loans
- No DOWN PAYMENT! This is the most important advantage of a USDA home mortgage. You can finance up to 100% of the appraised value of the home you are purchasing. As mentioned above, this is one of the last 100% financing programs left.
- There are no mortgage insurance payments. Unlike FHA-insured residential loan programs, USDA home loans do not have an upfront mortgage insurance payment or an ongoing monthly mortgage insurance payment. This will save you a lot of money over the course of the loan term.
- Competitive interest rates. The mortgage interest rates for these USDA guaranteed housing loans are very competitive with other 30-year fixed rate loans offered by conventional mortgage lenders and FHA-approved lenders.
- The USDA Rural Development Loans are insured by the government. Because the government is guaranteeing the loan, lenders are more willing to provide the best lending terms, including lower interest rates.
- The credit guidelines for USDA mortgages are not stringent and provide a lot of room to accommodate borrowers with spotty credit history. While credit requirements are flexible, the borrowers are still required to show that they have the financial ability to repay the loan. Although USDA credit guidelines are not as strict as conventional loans, most lenders may still require that you satisfy other conditions in order to qualify.
- There is no stated maximum loan amount. The maximum loan amount for a USDA mortgage is based entirely on your ability to repay the loan, not limited by the purchase price or appraisal value of the residential property.
- USDA rural home loans can be used to finance existing homes as well as new construction homes. There are no restrictions on the size or design of the home being purchased. If you are going to buy an existing home, it will have to be in good condition with no outstanding structural issues.
- USDA mortgages are 30-year fixed rate loans, and there is no prepayment penalty for paying off the loan ahead of the repayment schedule.
- The borrowers are not required to be first-time homebuyers.
- You can use gifted funds for down payment and also for paying the loan closing costs. There is no specific limit on the amount of gifted funds.
- Closing costs and repairs can be included in the loan amount up to the appraised value of the property.
- Repairs can be financed into a USDA mortgage. Another great benefit of this rural home loan is you can finance 100% of any repairs into the loan based on “after repair appraised value”. So if the house you are intending to buy does need some repairs but you do not have the cash reserves for the repairs, you can just roll them into the mortgage loan amount. This means that USDA Rural Housing Loans can be renovation loans also!
Sure, there are advantages to the USDA loan, but there are also some downsides. One downside is that not all properties will be eligible for USDA financing. The property must be located in a USDA-designated rural area.
Another downside is that there are some income restrictions based on the HUD-determined median income of your area or county.
The last one being that there is a one-time payment guarantee fee of 0.35% of the amount of the loan which is payable at closing and the guarantee fee can be financed into the mortgage.
Should these downsides stop you from getting a USDA loan? No – but these disadvantages should help you set your expectations when you get a USDA home loan.
USDA home loans are perhaps the best rural home loan products available in the residential lending market today!
Get matched with a lender who can help you with the USDA loan program as well as help you get qualified for any home buyer assistance programs available today.