With the COVID-19 pandemic still going strong, many city dwellers may be considering a move to the country—and there's a specific type of mortgage that can help make this a reality, called a USDA loan.
Offered by the U.S. Department of Agriculture and backed by the agency’s Rural Development Guaranteed Housing Loan Program, these mortgages are designed to help buyers with moderate or low income purchase property outside cities.
They accomplish this by offering several key benefits—such as low or no down payments and looser qualifications for income and credit history.
“More people should absolutely consider using USDA loans to finance their homes,” says Jan Hadder, regional vice president of the builder division at Silverton Mortgage in Columbia, SC. “If you’re not living in the city, this can be a great option to finance your home."
USDA loans could be a boon to the wave of buyers who are currently contemplating fleeing cities right now.
As it happens, searches for homes in rural ZIP codes jumped more than 15% this May, compared with a year ago, according to realtor.com® data.
Yet many Americans aren’t aware of USDA loans, or assume that they don't qualify. They may also have other assumptions about these mortgages that aren't true or in step with recent changes in the terms.
If you want to avoid overlooking this hidden financing gem, here are a few things to know about USDA loans today.
You don't have to buy a house in the boonies
The biggest misconception about USDA loans is that you have to live in the middle of nowhere.
In reality, homes qualify as long as they're located outside a metropolitan area. In fact, communities with populations of up to 35,000 may be fine. The USDA offers an online map where you can search for properties that are eligible for the loans.
Matt Ronne, a loan originator at Motto Mortgage Preferred Brokers in Athens, TN, says USDA loans are a “vital asset” to home buyers in his area of southeastern Tennessee.
“It has been a high-demand product,” he says. “My county, McMinn, and most of the surrounding counties are 100% eligible for this type of financing, as long as those clients meet the credit, income, and property requirements.”
You don't have to be destitute—and income limits recently increased
"Many people think that the USDA loans are meant to be subsidized housing, or that they are only intended for use by those with very low income,” says Gwen Chambers, a mortgage loan originator at Motto Mortgage Superior in Germantown, TN.
But that's not the case. There are actually two types of USDA loans. Direct housing loans are for low-income individuals; guaranteed loans are designed for moderate-income buyers.
The USDA recently increased its income limits for loans, allowing more home buyers to be eligible. In most locations, the income limit for households with one to four people is $90,300, and $119,200 for households of five to eight people.
USDA loans are easier to get than ever
The income limits have been raised, Hadder says, and some elements of the application process for certain USDA loans have been relaxed.
For example, in response to COVID-19, the period for which certificates of eligibility are valid has been extended for some borrowers, and some parts of the application process will be streamlined, including credit reviews and loan processing.
Although the specifications vary by lender, borrowers typically need a minimum credit score of 640, whereas conventional home loans often require a credit score of 700 or higher.
“These new loan changes are designed to make it easier for a borrower to qualify for a USDA loan,” Hadder says.
Because certain parts of the application process will be waived or relaxed, she says, "borrowers will hopefully have a better chance of getting approved.”
USDA loans aren't just for first-time buyers
Another misconception about USDA loans, Ronne says, is that they’re just for first-time home buyers.
“USDA only allows a borrower to own one property at a time, so using the USDA loan program allows for additional purchases in the future, as long as the current home is sold, or will be sold prior to closing on the new one,” he says.
As long as buyers continue to qualify, they can use the USDA program as many times as they want, Chambers says.
USDA loans have great interest rates
Mortgage interest rates for traditional loans have dropped to record lows in recent months, and now hover around 3%. The rates for USDA loans, however, are even lower.
As of Sept. 1, interest rates for Single Family Housing Direct Home Loans are 2.5% for low- and very low-income borrowers.
“The rates on USDA loans are often very competitive, and the fees are relatively low,” Chambers says. “In my community, consumers often find USDA loans to be their go-to loan of choice.”
USDA loans carry few added costs
In addition to low interest rates, USDA loans offer families the opportunity to own a home with few out-of-pocket expenses, like closing costs.
In addition, certain USDA loans offer 100% financing with no down payment, welcome news in today’s uncertain economy.
“Now, more than ever, because of the potential instability in the workforce over COVID-19 and possible future furloughs, layoffs, and cutbacks, having money in the bank to fall back on in case of emergencies has never been more important,” Ronne says.
“Personally, as a mortgage broker, I never want to see a buyer exhaust their savings for a down payment when they may not have to, especially a first-time home buyer,” he says.
More investment in rural communities benefits homeowners
The USDA loan programs can also give rural homeowners a boost indirectly. The agency recently announced new initiatives to increase private investment in rural communities across the country, Hadder says.
This includes changes to four of its business loan programs to standardize the requirements for loan processing, credit review, loan service, and loss claims.
These measures could help rural homeowners. New investment could add new jobs to an area, create better schools, and boost local economies.
This could increase property values and attract new residents to the area—all good news for local homeowners.
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