Types of Loans - USDA

USDA stands for United States Department of Agriculture.  Over the last few years USDA or Rural Housing Loan has become the hottest loan in town for most low and moderate income families.  This is because you can get a loan for 100% financing with no Mortgage Insurance.

These programs are tailored towards people who live in Rural Areas.  To determine if the house you are thinking about purchasing is in a rural area and if you meet income qualifications click on the following link:

http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do

There are two types of loans that USDA offers

USDA Guaranteed Rural Housing Loans
USDA Guaranteed Loans are the most common type of USDA rural housing loan and allow for higher income limits and 100% financing for home purchases. USDA Guaranteed Loan applicants may have an income of up to 115% of the median household income for the area.   All USDA Guaranteed Loans carry 30 year terms and are set at a fixed rate.


USDA Direct Rural Housing Loans
USDA Direct Housing Loans are less common than USDA Guaranteed Loans and are only available for low and very low income households to obtain home ownership, as defined by the USDA. Very low income is defined as below 50 percent of the area median income (AMI); low income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of AMI.  You can click here http://www.rurdev.usda.gov/HSF-Direct_Income_Limits.html and see if you qualify for this loan.

Why choose a USDA Mortgage?

1. USDA loans require NO down payment
2. In some cases you can finance your closing costs, Seller can pay up to 6% of your closings costs so really you don't have to come to the table with ANY money.
3. There are NO prepayment penalties for USDA Rural Housing Loans.
4. USDA loans has no monthly Mortgage Insurance.
5. A USDA loan is available to all Rural areas of the country, provided a market exists for the property and the home meets HUD's minimum property standards.
6. You can use this loan to purchase a New or Existing one family home in Rural Areas.
7. No Manufactured Homes allowed unless it is Brand new (talk to your lender about this)
8. USDA loans are offered at 30 years terms with a fixed interest rate.

What is Mortgage Insurance?

What is it?
Mortgage insurance is a financial guaranty for the lender that will help to reduce or eliminate a loss in the case of a default by the borrower, and it is almost universally required on loans where there is less than twenty percent equity. That means if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your homes value, you are going to be required to pay mortgage insurance. In other words, mortgage insurance spreads the risk between the lender and the insurance company.


“Why do I have to have it?”
The answer to that is simple: without mortgage insurance, many lenders would not be able or willing to accept the risk of lending without having twenty percent equity, making it significantly more difficult for customers to purchase a home, or use their home equity to consolidate debt or make an addition to their home. So while it may seem like you do not gain any advantage by having to pay mortgage insurance, it may be the factor that is allowing you to gain approval for your loan. In addition, a bill was passed in 2007 that allows people to write off their mortgage insurance on your taxes, just like you would for the mortgage interest that you pay. There are income restrictions on this provision, so check with a tax professional to see if this would benefit you.

“When can I stop paying mortgage insurance?”
The answer to that will vary depending upon how your mortgage is worded, but there are a few general guidelines that are pretty universal. If you have a conventional mortgage, you are going to need to pay the mortgage insurance for at least the first year of your loan. If you have paid down the balance below eighty percent of the original purchase price or value, you can send a written request for the lender to remove the insurance (a lot of contracts say you can request the removal at eighty percent, they are required to remove it when the balance gets to seventy-eight percent). Some lenders will also allow you to pay for an appraisal, and if your home has risen in value to give you the twenty percent equity, they will also remove it. If you have an FHA guaranteed loan, you are going to be required to pay the monthly mortgage insurance for at least the first five years of the loan, and in order to have it removed you need to have the loan balance down to eighty percent of the original purchase price or value; they will not allow you to go off of what the appraised value is.

Mortgage insurance may seem to be an unnecessary monthly cost to many first time home buyers, but it is in fact what allows most people to purchase their first home. With the law that allows homeowners to write this cost off their taxes, it has become a little more consumer friendly as well.