How USDA Home Loans Make Homeownership Affordable

When Stan Schultz’s son was looking to buy a ranch house on a few acres, the Fifth Third Director of Mortgage Development recommended a USDA Rural Development Loan. The program helps qualified homebuyers to purchase homes in rural and suburban areas—with little or no down payment. And given that the property was outside of Andersonville, Indiana, Schultz thought it was likely a fit.

“My son was floored when he went to close and they gave him a check for the $500 he paid in earnest money,” Schultz says. That’s because USDA loans cover 100% of the appraised value of the property. If the purchase price is less—which was the case with Schultz’s son—buyers can even finance the closing costs.

The program is a niche offering, meaning many Realtors may not realize it's an option for their clients. But it's one that they should explore for their clients. The geographic qualifications—that the home is in a rural or suburban area—often cover more areas than people expect.

Dive into the basics of USDA Rural Development Loans and discover how they make homeownership a possibility for more buyers.

What are the benefits of a USDA Rural Development Loan?

The biggest benefit of the USDA loans is that they enable qualified homebuyers to purchase a property with little or no down payment. As Schultz noted, the program will lend homebuyers an amount up to 100% of the appraised value of the property. If there’s a difference between the purchase price and the appraisal, buyers can borrow a higher amount to pay for purchase-related expenses. The USDA loan is a fixed rate product, so the interest rate doesn’t change over the 30-year term of the loan. And while the loans do require that buyers purchase mortgage insurance, the premium is typically 1%—less than other loans, including the popular FHA.

How do buyers qualify for a USDA loan?

First, the property that the buyer is purchasing must be in a qualified rural or suburban area. However, the USDA designated areas can include outlying suburbs of cities—areas that Realtors and homebuyers may not initially think of as rural. The USDA notes that in general, areas with a population of 35,000 or less are eligible. If a buyer is interested in a rural or suburban property, you can input the address into the USDA’s website to determine if they’re candidates for a loan. Broadly, the program also requires that borrowers have an adjusted income at or below the low-income limits for the area where the property is located. However, again, this is also worth checking out as the income requirements are greater than people may anticipate.

How do they compare to FHA loans?

The main difference is that FHA loans require borrowers to make a down payment on the home of at least 3.5%. Buyers will also need to pay for their closing costs. So, at a minimum, the out-of-pocket expense at the time of purchase is more with an FHA loan. In addition, the mortgage insurance premiums for USDA loans are usually less than FHA loans, a factor that works to decrease the monthly payment. Schultz notes that given the choice, the USDA loan is a better choice of an FHA nearly every time.

What else should homebuyers consider?

It’s easy to stay focused on the interest rate. However, Schultz says that it’s important to look at all the factors that go into the transaction when borrowers are determining which loan product is best for them. A lower monthly payment, for example, may be important to some buyers. Others may want to limit initial out-of-pocket costs. Each factor makes a difference, and homebuyers should evaluate what they need the most.

Interested in learning more about USDA Rural Development Loans or other affordable mortgage products? Connect with Fifth Third today.