Important request by the author: Before you disregard this article because you don’t think you will ever own a home in a rural area, please see the USDA website to find out which areas in this country are considered “rural” by the USDA. I think you will be pleasantly surprised that this program may be applicable to you! Read on…
The Rural Housing loan, which is guaranteed by the USDA’s Rural Housing Service, is a home loan program designed for low to moderate income families in rural areas. Their “guarantee” means that they will compensate any lender for any mortgages that go to foreclosure.
This “guarantee” also means that lenders are more willing to lend their money to people with less than stellar credit and little money for a down payment. In fact the USDA home loan does not require any down payment and many lenders will allow credit scores as low as 620.
The “guarantee” also means that lenders do not require any mortgage insurance on Rural Housing loans, which is probably the biggest advantage of this program. This results in a lower monthly payment than what some of the other mortgage programs offer.
More Benefits of the Rural Housing Mortgage Program
- Rural Housing allows for 100% financing. If you don’t have a down payment or if you would prefer to keep your money in other investments than Rural Housing may be the loan program for you. And if the sellers are willing to pay your closing costs, you could own a home without bringing any money to the closing table. (Consult with your Realtor about negotiating for seller-paid closing costs)
- The Rural Housing loan is not just for first time home buyers. Your state may sponsor a 100% financing mortgage program but it is likely that it is reserved for just first time home buyers. Rural Housing doesn’t discriminate if you have owned a home before.
- Rural Housing still allows credit scores down to 620. You will not be disqualified to participate in the Rural Housing loan program if you have a shaky credit history. There are very few programs that exist that allow for 100% financing and a 620 credit score.
The Limitations of the Rural Housing Mortgage Program
Just like all loan programs there are always limitations that may make a different loan program more beneficial for your situation. For example, the Rural Housing loan doesn’t offer any mortgage term other than 30 years. If you are somebody that needs a 5 year ARM for its lower interest rate than Rural Housing is not for you. Other limitations include…
- If you have more than a 20% down payment than you will be denied by Rural Housing.
- If you make too much money (see income limits here) than you will be denied by Rural Housing.
- If you want a 15 year mortgage than Rural Housing is not for you.
- You can not refinance into a Rural Housing loan unless you already have a Rural loan.
- You can not purchase a duplex or even a home with a mother-in-law apartment with a Rural Housing loan.
- You can’t own more than one home and get a Rural Housing loan.
One Really Big Disadvantage
To be able to guarantee their mortgages, Rural Housing keeps a reserve of funds to compensate lenders when a borrower defaults on their mortgage. To fund this reserve Rural Housing charges an upfront fee of 3.5% on every loan, which is the most expensive upfront fee of any loan program out there.
Starting Upside Down: The 3.5% funding fee can be financed and so you are really financing 103.5% of the home purchase price, but this means you will start your home ownership experience with a mortgage that is larger than your home is worth. Back in 2003 when homes were appreciating at 20% a year this was no big deal, but in today’s more stagnant real estate market this is much more uncomfortable.
Just like any loan program, the Rural Housing loan does serve a purpose for the right situation. If you are planning on staying in the home long term (say longer than 5 years) than Rural Housing can be a great option. Any less than 5 years and it is hard to justify paying that 3.5% funding fee. If you have the choice between FHA and Rural Housing and you are planning on being in the home longer than 5 years, I would recommend Rural Housing as the better loan option. You will have a lower monthly payment, the interest rate should be the same as FHA, and you will make up the 3.5% funding fee by not paying any monthly mortgage insurance.