Home buyers looking for aÂ zeroÂ downpayment mortgage with low monthly payments should consider USDA home loans.
The United States Department of Agriculture (USDA) loan, also known as the Rural Development (RD) loan, requires no downpayment and is available to lower-credit applicants.
Interest in these loans is growing as buyers learn their benefits. More than 166,000 families used a USDA loan in fiscal year 2015 alone, according to the agency.
Buyer enthusiasm is not surprising. The USDA loan is the onlyÂ zero-down loanÂ on the market today forÂ home buyers without military service history.
Rural Development loans are available based on location of the property, not life experience. Specifically, USDA buyers need only to find a home in a â€śruralâ€ť area as defined by USDA. But the definition of rural is quite liberal: about 97 percent of all U.S. land mass is eligible.
USDA loans come with ultra-low rates and less expensive mortgage insurance, beating affordability of even FHA loans.
Most home buyers are surprised at just how affordable these loans are.Click to see today's rates (Jan 16th, 2017)
USDA loansÂ allow 100% financing, meaning no downpayment is required. This is because USDA loans are insured, or backed, by the U.S. government.
Zero downpayment does not mean buyers pay higher rates. USDA loans offer similar or lower rates than can be found with FHA or conventional loans.
Mortgage insurance is also less expensive, costing about $29 per month for every $100,000 borrowed.
For aÂ $100,000 loan balance, FHA mortgage insurance costs $70 and conventional 97 would be around $80 per month.
USDA loans, however, have a slight disadvantage compared toÂ Conventional 97 in that they comeÂ with an upfront fee of 1.00% of the loan amount. The fee is not required in cash at closing. Rather, the amount is wrapped into the principal balanceÂ and paid off over time.
This is the same model as applies to FHA loans, which require a 1.75% financed fee upfront.Click to see today's rates (Jan 16th, 2017)
The fact that USDA loans donâ€™t require a downpayment saves the home buyer a substantial amount upfront. This reduces the amount of time it takes a buyer to become ready to buy a home.
Other low-downpayment options, such as FHA loans or a Conventional 97, still require a downpayment of 3.5% and 3% respectively.
On the average home price of about $250,000, a USDA borrower would need $8,750 less upfront than an FHA borrower.
USDA loans come with a higher balance, due to low downpayment, but that's somewhat offset by lower rates and more affordable mortgage insurance.
Assuming a home price of $250,000, upfront and monthly costs of these three loan types are as stated below.
Keep in mind that these payments do not include other costs like property taxes and homeowner's insurance, and are based on sample, and not live, rates and APRs. However, this cost exampleÂ shows that USDA requiresÂ a similar monthly payment compared to FHA, without the 3.5% downpayment.
Compared to a Conventional 97, the USDA loan has a lower upfront and monthly cost.
Even though the USDA loan amount is higher due to zero downpayment, monthly payments are the same or lower than the other options.
Monthly payment is more important than principal balance for many buyers. Lower monthly costs make the USDA loan more affordable for families with tight budgets.Click to see today's rates (Jan 16th, 2017)
USDA home loans have other benefits besides low initial and monthly costs. They also have flexible credit requirements compared to other loan types.
For a USDA loan, home buyers will only need a credit score of 640. Fannie Mae guidelines set the minimum credit score at 620 for a conventional 97, although lenders will typically set a higher minimum of 640 to 680.
The only popular loan program with a lower required credit score is FHA, which only requires a credit score of 580.
USDA home loans are available to buyers at or below certain income limits. This guidelines is set in place to make sure the program is used by those who need it most.
But the income limits for a USDA are generous. To be USDA eligible, the home buyer can make up to 115% of the areaâ€™s median income. Assuming a family of four, below are the annual income limits for some major areas:
Larger families are permitted to make even more. For example, a family of five or more in the Los Angeles area could make $129,600 and still be eligible.
Because USDA loans are backed by the United States Department of Agriculture, they offer benefits that other programs cannot, like small upfront costs and ultra-low rates.
The loose requirements, easy affordability and 100% financing available with a USDA mortgage make it a difficult option to beat.
Get a USDA rate quote, which comes with an property and income eligibility check. All quotes include access to your live credit scores and a personalized monthly payment estimate.Click to see today's rates (Jan 16th, 2017)
*The payments shown above assume a 720 credit score, single family home, and property in Washington State. Conventional 97 PMI rates are provided by MGIC Ratefinder. Payments do not include property taxes, homeownerâ€™s insurance, HOA dues or other costs, and are based on example APRs that are meant to demonstrate a comparison, not currently-available rates. Sample APRs used are as follows: USDA 4% APR; FHA 3.75% APR; Conv. 97 4.25% APR.Â Check with a lender here for a personalized rate and APR quote.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)