There are several benefits of a USDA loan that make them quite appealing. For the right household, these government-guaranteed loans are actually pretty incredible. The only downside is that not everyone will qualify, e.g. a borrower’s income exceeds the USDA loan limit. Or perhaps they’d rather live in a big city than a rural area where USDA loans are not available.
But don’t be thrown off by the USDA’s rural area designation. Many suburbs outside the boundaries of major U.S. cities qualify. Bedroom communities like Camas, Washington — just outside Portland, Oregon — are USDA-eligible. In fact, most big-city counties will have some areas within them that are eligible. They’re easy to lookup with USDA’s property eligibility calculator, too.
There’s no question about it, zero-down is a huge advantage to USDA loans, probably the biggest draw. And if you’re not a military veteran, this is one of the only mortgage programs with 100% financing that doesn’t require a second lien.
USDA loans may be used for first time buyers as well as previous home owners. One aspect that’s really helpful for buyers who are just starting out is the acceptance of nontraditional credit references. A solid track record of paying on-time and in-full for things like rent payments, student loans, utilities, etc. may be considered during underwriting.
Whatever your situation, it’s always a good idea to know both sides. Here’s a list of USDA loan pros and cons.
USDA Loan Advantages
- No down payment (zero down)
- Ability to finance the upfront mortgage insurance
- Favorable interest rate
- Forgiving underwriting guidelines
- Non traditional credit allowed
- 29/41 qualifying ratios
- Down payment gifts are okay
- No prepayment penalty
- Loans are assumable
- For purchase or refinance
- Not limited to first time home buyers
- USDA mortgage insurance is lower than FHA loans
USDA Loan Disadvantages
- Mortgage insurance is required (upfront and annual)
- Property must be in USDA eligible area
- Income limits
- Single family, owner occupied only
- 30-year term only
- Fixed rate loans only