Effective October 1, 2016, an already popular program and tool in the quest for home ownership just became even more attractive. In short, the USDA – United States Department of Agriculture – loan program has reduced it’s upfront guarantee fee and monthly mortgage insurance premiums meaning lower costs for borrowers when financing their homes. We’ll explain what this means further on in the article but first some background.
The USDA and the Office of Rural Development as we know them were developed in the 1990’s as a governmental body whose mission it was to help make homeownership affordable in rural areas throughout our nation. Thankfully, the definition of “rural” as they implement it has been fairly liberal – meaning many suburban neighborhoods outside of major metropolitan areas often qualify. Predominantly popular with first-time homebuyers, this program touts the ability to enter into financing with a 0% down payment. Compared to the highly popular FHA program, that’s a possible reduction of 3.5% helping alleviate what is often the main barrier to homeownership, saving funds for a sizable downpayment.
Program eligibility rules apply.
That’s to be expected.
In addition to purchasing in an area supported by the program, income eligibility, and credit guidelines are spelled out on their website. That said, creditworthiness is less stringent than you might think given the ZERO down component of the loan. Currently, credit scores 640 and greater could qualify.
Now, to the changes. It’s important to understand that like FHA loans, USDA requires 2 types of fees added to the loan balance to help guarantee the loan. The first is an upfront guarantee, and the second is a monthly surcharge paying for mortgage insurance. Both costs have been reduced drastically as of October this year.
- Former Rate – 2.75% of loan
- Current Rate – 1.00% of loan
Monthly Mortage Insurance Cost:
- Former Rate – .50% of loan
- Current Rate – .35% of loan
The new loan cost guidelines now make the mortgage insurance and guarantee costs less costly than the FHA loan. Putting these numbers into a real life example:
Former Rates: Upfront Guarantee – $6875(Added to Loan Amount) + $104 Monthly Premium
Current Rates: Upfront Guarantee – $2,500(Added to Loan Amount) + $73 Monthly Premium
Obviously, our example is for illustration purposes only and we would invite you to speak with a loan origination professional for more details. The bottom line is an already useful program just became more affordable by a lot.
Wondering if a home or neighborhood you’re considering qualifies? Let us know and we can put you in touch with preferred lending partners that can help you find out.
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