The Pros and Cons of the USDA Guaranteed Loan

Kimberly Bean
Kimberly Bean
Published on January 12, 2017

Most of us can’t pay cash for a new Southern Maryland home, so we need a mortgage. Likewise, most of us aren’t in the market for a luxury home, so the mortgage we need should be one created for those with a more modest income.

Thankfully, the United States government offers several programs, including the VA loan, the FHA-backed loan, and the USDA Rural Development guaranteed loan. If you aren’t a current or former member of the military, you’ll have only the FHA and USDA products to choose from if you want a government-guaranteed loan. While both products have advantages and disadvantages, let’s take a look at those of the USDA guaranteed loan.

Advantages of the USDA Guaranteed Mortgage

If you are short on cash but really want to own a Southern Maryland home, you’ll be happy to learn that the USDA loan was created for low- to medium-income homebuyers. It requires no down payment, and the borrower can use gift money to cover closing costs. Buyers can even accept up to 6 percent of the sales price from the seller in closing costs concessions! These are compelling reasons to consider the USDA mortgage program, but consider these advantages as well:

  • The government’s repayment guarantee (should the buyer default) allows lenders to be more generous with interest rate offerings and more lenient credit standards than they would be on a comparable conventional loan.
  • There is no pre-payment penalty for a USDA-backed loan.
  • The mortgage can also be used to purchase some manufactured homes.
  • The USDA loan can be used to refinance a home as well.

Disadvantages of the USDA Guaranteed Mortgage

You’ll have to take the good with the bad if you’re interested in participating in this zero-down loan program, so here are some of the cons of the USDA guaranteed mortgage. The income requirements may be an advantage if you fall within the income limits, but it’s a disadvantage if you earn over the maximum allowable income. (See your lender to determine the current limits.)

There are also eligibility requirements for the Southern Maryland property you want to purchase. Chief among these is that it must be considered “modest,” without luxury features like a swimming pool. The home must also be located in an area designated as “rural” by the USDA. The USDA defines rural areas as “open countryside, rural towns (places with fewer than 2,500 people).” If you hope to use the home as a rental, you won’t qualify for the program; it’s open only to borrowers who plan to live in the home.

Here are a few other “cons” of the USDA Guaranteed Loan program.

  • There is a funding fee of 1 percent of the loan amount. Now, there is a bright side to this – it can be added to the loan so it’s not money you’ll need to pay out-of-pocket.
  • There is another fee, amounting to 0.35 percent, that is similar to the mortgage insurance premium for FHA loans or private mortgage insurance on conventional loans. This fee stays in force for the life of the loan and is paid annually.
  • Both the lender and the USDA subjects the loan to underwriting, so you can expect closing to take a few weeks longer than other loans.

There is a lot more to know about this program. We aren’t lenders, but we’re happy to put you in touch with the appropriate professional.

**You may be eligible for $10,000 for down payment and closing assistance. Interested in getting pre-approved for a home loan? Complete our form and we’ll connect you with one of our lender partners.**

Leonardtown MD Homes for Sale and Real Estate Services in Southern Maryland. You now have a search engine to help you with your Southern Maryland home search! And I’m ready to provide you with a custom home valuation if you’re considering selling your home. Let’s connect to discuss how I can help you. Contact Kimberly Bean at 301-440-1309

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