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Here's what you need to know about USDA loans

One of the most overlooked mortgage programs available to consumers is the USDA loan program.
11/2/2016 4:45:52 PM

Once you've made the decision to buy a home, you'll most likely need to choose a mortgage to help with the purchase. There are plenty of options out there for a home loan, each with their unique pros and cons.

One of the most overlooked mortgage programs available to consumers is the USDA home loan program. According to the Mortgage Bankers Association, during the week ending Oct. 21, USDA mortgage applications comprised less than 1% of total mortgage applications. This was unchanged from the week before and is common for this type of loan.

While most Americans might opt to pursue FHA loans, VA loans or other residential mortgage products, the USDA loan is a viable option for many people. Here's what you need to know about them.

What's in a name?

USDA loans are backed by the U.S. Department of Agriculture, which means that when a lender issues a loan, the USDA financially protects the lender in the event that the borrower isn't able to keep up with the payments. However, according to The Mortgage Reports, this type of loan also goes by a handful of other names:

  • Single-Family Housing Guaranteed Loan Program
  • Section 502 loan
  • Rural Development Loan

From sea to shining sea

Even though it's called the rural development loan, there are plenty of places across the country that aren't off the beaten path, yet still eligible for this loan type. In fact, homes on about 97% of the nation's land mass can be purchased with a USDA loan; some are even just outside major metro areas.

To find out if the home you have in mind qualifies, check out the USDA's eligibility page.

100% financing

Saving for a down payment is often cited as the most challenging aspect of making a home purchase, according to the National Association of Realtors' 2016 Profile of Home Buyers and Sellers. Aside from VA loans, USDA loans are the only mortgages available that offer 100% financing. This means that no down payment is required at the time of the purchase, making this mortgage product an attractive one for younger homebuyers, first-timers, or anyone who has struggled to save money for a purchase.

As The Mortgage Reports pointed out, difficulty saving for a down payment shouldn't be the one thing that gets in a prospective homebuyer's way because it doesn't always make financial sense. If it takes a year to save for a small down payment on a home, but home prices increase in that year, you haven't really made much progress. Buying with a USDA loan would be a smarter option in that instance for those who qualify. 

Requirements

Like any other loan product, there are certain requirements you must meet to be considered for a USDA loan. According to The Mortgage Reports, these include:

  • Your income must be less than 115% of your area's median income.
  • The house must be your primary residence, and you can't own another home within commuting distance.
  • You can't have experienced bankruptcy in the past two years.
  • Your monthly housing payment must be 29% or less of your monthly income, and your total monthly debt payments can't be more than 41% of your monthly income.

There are certain instances where a little bit of leeway is allowed. For example, some people with a high credit score may not be held to the 29/41 debt ratio.

If you're considering a home purchase that isn't within a major city, you might qualify for a USDA loan. Now is a great time to take advantage of this opportunity while mortgage rates are relatively low.

Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.