If you are planning to buy your own home in 2019, now is a good time to start to consider your options for a mortgage.
Say you find a home with a monthly payment that you can afford, but your savings are limited. In this case, it will be very helpful if you can find a loan that does not require any down payment. Maybe you already know that VA loans offer this service, but you may not know that there is another type of loan which offers the same benefit, without requiring that you be a veteran or in service.
What is a USDA Loan?
In Missouri, USDA loans are guaranteed by the U.S. Department of Agriculture. But aside from that, what is so special about a USDA loan?
Advantages of USDA Loans
There are several advantages to USDA loans that make them attractive loan options. We will touch on some of them here.
USDA loans do not require a down payment. If you only have a little bit of savings, this will help you to free up resources. The money you would have spent on a down payment can instead go towards home furnishings or a rainy day fund. There are other options for a low down payment, but they can still add up. A conventional loan for $200,000 with a 3% down would have you paying $6,000.
Reduced Loan Costs
When you get a USDA loan, there are both upfront and monthly costs associated with it, called guarantee fees. However, you will still pay less for these than you would for mortgage insurance premiums if you had gotten an FHA loan. There is actually a significant difference. With a $200,000 loan amount, the mortgage insurance premium would be 1.75% for an FHA loan. This would come out to $3,500 upfront. In addition to that, you have an annual premium based on your down payment. If you made a 3.5% down payment, the premium is 0.85%. This will work out to paying $141.67 per month.
Now, compare that to a USDA loan for the same amount – $200,000. USDA loans have upfront guarantee fees of 1% of the loan, so that would be $2,000 either paid at closing or added to the loan. The guarantee fee is just 0.35% of your unpaid balance each fiscal year. So your premium would initially be $58.33 per month, and it would go down as you paid off the loan. This is a much lower monthly payment.
Qualifying for a USDA Loan
Some things will help you qualify for any sort of loan. One of these is to keep your debt-to-income (DTI) ratio low. DTI compares your monthly debts to your monthly income. It allows lenders to see that you can make your monthly payments without straining your budget.
In order to get a USDA loan, you need a median FICO score of at least 640.
Additionally, it is wise to have some reserves set aside so that if you lose your job or have some other kind of emergency, you can still make your monthly payments.
These general tips are helpful, but there are some additional qualifications that relate to USDA loans in particular.
In order to qualify for a USDA loan, you must live in an area that is eligible for them. USDA loans were designed to help develop affordable housing in rural areas. You can get a USDA loan without being a farmer, but you cannot live in or near a major population area. Fortunately, most of the country qualifies for a USDA loan. You can put your address into an eligibility map. Any area not marked by the color orange is eligible for this program.
Another requirement for qualifying for a USDA loan is that you and any other adults in your household cannot make over 115% of the median income. This is household income and includes the income of any adults living with you, even if they are not included in the loan. However, in many circumstances, the cost of childcare can be excluded from this, and if any adults in the household are full-time students, then only part of their income is counted.