Breaking Down the Most Common Myths About USDA Loans

Blog posted On April 08, 2021

Initially created to encourage rural development, the USDA Loan has helped nearly 1.5 million home buyers become homeowners. Backed by the U.S. Department of Agriculture (USDA), the USDA Loan offers zero down payment, reduced mortgage insurance costs, and low mortgage rates. It’s a great deal that saves buyers thousands of dollars in upfront costs, but over the years it has become increasingly less popular.

In 2020, just 137,000 people used their USDA Loan benefit. In comparison, over 8 million people are currently using an FHA Loan. Many people assume that they don’t live in an eligible area. Others may not be aware of the program’s benefits. So, to set the USDA record straight, here are four common myths, debunked.

Myth #1: USDA Loans are only available for rural properties.

It makes sense that most people assume the USDA Loan is only available for farms and other rural residencies. While the loan was initially designed to help develop these areas, it’s not its sole purpose any longer. Surprisingly, 97% of U.S. landmass is eligible for USDA financing. Many USDA buyers live in the suburbs, and over 100 million are eligible for financing. 

To determine loan eligibility, the USDA doesn’t look exclusively at a property’s location. In fact, they mostly look at the population of the town. “The USDA’s definition of ‘rural’ is much broader than many would assume,” said Ed Barry, CEO of Capital Bank. “Home buyers often jump to the conclusion that the neighborhoods or addresses they’re considering aren’t ‘rural’ in the traditional sense, so they don’t even realize a USDA loan can be an option.”

Checking your USDA location eligibility is easy and can be done online by visiting the USDA website.

Myth #2: Because they don’t require down payments, USDA Loans have costly mortgage insurance.

USDA Loans have the smallest down payment available (aside from VA Loans, which are only available for military members, veterans, and their spouses). It allows as little as 0% down and unlike other low down payment mortgages, USDA mortgages have some of the lowest insurance costs too. 

Comparing USDA insurance to FHA insurance, it’s much more cost effective. A $200,000 mortgage funded by a USDA Loan would require an upfront funding fee of 1% while an FHA loan would require 1.75%. That’s $2,000 compared to $3,500. Annually, your insurance would then cost 0.35% for a USDA Loan and 0.85% for an FHA Loan. Per month, that equals to $58 for USDA insurance an $139 for FHA insurance. Over a 30-year loan term, your USDA insurance costs would be $22,880 vs. $53,540 for an FHA loan. Plus, an FHA Loan requires a down payment of at least 3.5%* – or $7,000.

Myth #3: You must be a first-time home buyer to qualify for a USDA Loan.

Anyone within the income and property limits can apply for a USDA loan. Whether you’re a seasoned expert or brand-new buyer, the USDA Loan can help you finance your home. However, if you’re a seasoned home buying expert, just remember that you won’t be able to use your USDA Loan for an investment property. The house you purchase with your USDA loan must be your primary residence.

Myth #4: USDA Loans are only for home purchases.

USDA Loans can be used for a home purchase, renovation, or refinance. Financing from a USDA Loan can help you make everyday fixes like roofing repairs, electrical repairs, or other safety updates, as well as renovations like a kitchen remodel. Like the USDA Loan for home purchases, the USDA Renovation Loan has 100% financing available. Using a USDA Renovation loan gives funds to make the updates and upgrades you need and combines these costs with your mortgage into a single loan.

To improve your chances of securing a USDA Loan, increase your savings and start paying down other debt. Though down payments aren’t required, you will likely still have to pay for some closing costs. Make sure that you meet the property eligibility and income requirements as well, which can be checked on the USDA website. If you have any other questions about USDA Loans or USDA Loan eligibility, let us know.

*FHA Payment example: If you choose a $250,000, 30 year loan at a fixed rate of 3.75% (3.94 APR) with a loan-to-value (LTV) of 96.5%, and a $173/month PMI, you would make 360 monthly payments of $1,315. Payment stated does not include taxes and insurance, which will result in a higher payment.

Sources: HUD, Money