The popular USDA home loan program just got aÂ lot more affordable.
In a surprise move, the United States Department of Agriculture (USDA) lowered upfront and monthly fees for its home loan program, effectiveÂ October 1, 2016.
This mortgage programÂ is extremely popular with first-time home buyers.
The biggest reason: it requires zero downpayment. But the Rural Development (RD) loan program, as it is also known, is a favorite because it comes with cheaper monthly mortgage insurance fees than do FHA loans.
USDAÂ fees have droppedÂ even further.
The USDA loan is nowÂ one of the most affordable home loans available, second only to the veteran-exclusiveÂ VA home loan.
A USDA home loan can make owning a home less expensive than renting one.
New home buyers who have never heard of the program probably will in late-2016 and into 2017; this mortgage could be their ticket to homeownership.Click to see your USDA loan eligibility (Apr 30th, 2017)
The purpose of the USDA mortgage is to promote homeownership in rural areas.
However, the definition of â€śruralâ€ť is quite liberal. Many suburban neighborhoods are eligible for USDA financing. Buyers often use this program just outside of major metropolitan areas.
The loan offers 100 percent financing, meaning no downpayment is required. Downpayment is one of the biggest barriers to entry for first-time home buyers, but a USDA mortgage eliminates thatÂ obstacle.
Potential buyers often assume that a high credit score is needed for USDA. The lower the downpayment, the reasoning goes, the higher credit score someone would need.
This isnâ€™t the case with USDA. Applicants with credits scores down to 640 are eligible.
Strong government backing allows lenders to approve mortgages that would not qualify under guidelines for other programs.
The surprising thing about these loans is that upfront and monthly mortgage insurance costs are not sky-high. USDA financingÂ comes with cheaperÂ mortgage insurance than do FHA mortgage loans.
On a $250,000 mortgage, a USDA loan nowÂ costs $100 per month less in mortgage insurance fees than FHA financing.
The amount by which USDA cut its own fees is surprising. It could actually help many homeowners move from "turned down" to "qualified."Click to see your USDA loan eligibility (Apr 30th, 2017)
Similar to FHA, the USDA mortgage requires two types of mortgage insurance: an upfront guarantee fee and a monthly fee.
The term â€śguaranteeâ€ť simply refers to USDAâ€™s loan backing that allows lenders to issue loans according to its guidelines.
The upfront guarantee fee before the change wasÂ 2.75 percent of the loan amount. The "annualÂ fee" was 0.50 percent, paid in twelve equal installments and included inÂ eachÂ mortgage payment.
Starting on October 1, 2016, the upfront fee has been updated.
The monthly fee also dropped.
The changes will be in effect from October 1, 2016 toÂ September 30, 2017. Typically, USDA re-examines financials of previous fee changes then raises, holds, or reduces fees accordingly. If loans in USDA's portfolio perform well, another drop could come in 2017.
But the 2016 reductions alone equal big savings for USDA home buyers.
The most significant change to home buyers will be the upfront fee. The fee is typically added to the loan balance, rather than paid in cash.
This is an advantageous arrangement, but it adds to the homeowner's final loan amount. At the formerÂ upfront fee of 2.75 percent, a USDA loan will add more than $6,800 in loan amount onÂ a $250,000 home purchase.
But the The fee reduction reduces the amount added to theÂ loan. This translates aÂ lower debt obligation, and lower payments.
USDA applicants will end up with lower loan amountsÂ based on the new, lower upfront fee.
These lower loan amountsÂ translate into reduced monthly payments as well. The payment savings on a $250,000, due to the reduced loan balance, would be about $20 per month.
The upfront fee is not the only reduction effective starting October 2016. The annual fee is dropping too.
The annual fee was formerly equal to 0.50 percent of the loan balance, paid in 12 "pieces" and included in each house payment.
That equals about $40 per month for every $100,000 borrowed.
That monthly rate is dropping to 0.35 percent annually, or about $30 per $100,000 in loan balance.
Accounting for reductions in both upfront and annual fees, USDA home buyers will save about $20 per month total per $100,000 borrowed.
This could mean the difference between being turned down and getting approved for some USDA home buyers. To qualify, you must meet debt-to-income requirements. Your income must be enough to sustain future monthly payments on credit accounts, including your home loan.
For instance, a home buyer is "allowed" maximum debt payments of 41% of her income. But, she is at 42%, and the lender can't approve the loan as-is.
With the new, lower mortgage insurance fees, her "debt-to income ratio" could fall enough to be approved.
Home buyers can seldomÂ increase their income, but they can reduce payments by choosing a USDA loan once these cost reductions take effect.Click to see your USDA loan eligibility (Apr 30th, 2017)
The USDA fee reduction announcement is in stark contrast to the agencyâ€™s history of increasing costs.
Less than a year ago, on October 1, 2015, the upfront mortgage insurance premium was lifted from 2 percent to 2.75 percent.
Here is the history of USDA fee changes:
The fact that USDA is now lowering their fees is a testament to the health of the housing and mortgage markets.
As the housing market recovers, the USDA program costs less to operate and sustain.Â The savings are passed on to USDA buyers.Click to see your USDA loan eligibility (Apr 30th, 2017)
USDA loan eligibility is based largely on geographical location of the home.
The agency publishes maps that detail areas in which applicants can buy a house with a USDA loan. A full 97% of U.S. land mass is eligible for the USDA loan program.
Besides this requirement, an applicant must:
Every year, home buyers opt for the more expensive FHA loan program, even when they are buying in USDA-eligible areas. Consumers often havenâ€™t heard about the program, or perhaps, their chosen lender doesnâ€™t offer it.
If you are buying in a suburban or rural area, it pays to check USDA eligibility maps. If your lender only offers you FHA, find another lender who has experience with USDA mortgages.
Choosing USDA will save you the 3.5% downpayment that FHA requires. And, now that 2016-2017 mortgage insurance fees are in effect, you will save money each month over FHA,Â as long you hold the home and mortgage.
Eligible home buyers shouldÂ weigh the benefits of a USDA loan.
USDA offers some of the lowest rates available, thanks to strong government backing. Rates are as low or lower than those of FHA.
Get a USDA rate quote for your upcoming home purchase. It takes just minutes to get started, and you could receive a pre-approval in just hours.Click to see your USDA loan eligibility (Apr 30th, 2017)
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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)