USDA pros and cons
USDA loans offer several advantages for borrowers, but you’ll need to consider some of the drawbacks as well.
Here are some of the best reasons to consider a USDA loan:
- No minimum down payment: Conventional loans and FHA loans both demand some form of down payment, but USDA loans have no such requirement.
- May not need cash reserves: Lenders may not require cash reserves to secure financing. However, including your qualifying balances might make it easier to qualify.
- No set maximum purchase price: USDA loans don’t have a borrowing limit. Instead, your maximum loan amount depends on your repayment ability.
- Lower mortgage insurance fees: Your upfront USDA guarantee fee is 1% of the loan amount and the annual fee is 0.35%. Both rates are lower than the FHA mortgage insurance premiums.
- Seller can pay closing costs: The seller can contribute up to 6% of the sales prices. You can also receive unlimited gift funds to reduce your loan amount.
These are the main disadvantages of this loan program:
- Good credit required: You’ll need a minimum 640 credit score to be eligible for this loan, similar to conventional lenders. FHA lenders may only require a score of 580 or less.
- Geographic restrictions: You must live in a rural area to qualify for USDA financing. Thankfully, the definition is flexible and many suburban and bedroom communities can be eligible if the population is below a certain amount.
- Maximum income limits: For a USDA Guaranteed Loan, your household income cannot exceed 115% of your county’s median household income (MHI). Households with an income 80% below the MHI will need to apply for a USDA Direct Loan. Direct Loans can have stricter property and application requirements but, like Guaranteed Loans, they don’t require a down payment.
- Lifetime guarantee fee: All USDA loans require an upfront and annual guarantee fee for the life of the loan. Unlike FHA and conventional loans, making a qualifying down payment won’t have any effect on whether or not you’ll pay mortgage insurance.
- Single-family homes only: Single-family homes are the only eligible property type. This includes townhouses and condos, as long as you use the unit for your primary residence. Investment properties are ineligible.