Reasons to Use a USDA Loan (Section 502 Loan)

​The USDA loan program is the least-used conventional or government-backed mortgage in today’s environment, and they are readily available to almost any mortgage lender or mortgage broker. 

Reasons to Use a USDA Loan
(Section 502 Loan)
By Pierre Mouchette | Real Property Experts

​Why a USDA Loan?

• Low Rates - equate to lower monthly payments, which leads to a higher qualifying loan amount.  USDA loan rates can be as much as a half-percentage point lower when compared to a conventional loan with a 20% down payment.  One reason why USDA rates are typically so much lower is the government guarantee.  If the ‘USDA Lender’ approved the loan using proper USDA guidelines, the lender is compensated for the loss if the loan ever goes into default.
• Relaxed Credit - the USDA requires lenders to verify that borrowers have a responsible credit history, but it does not establish their minimum credit scores.  Lenders do set credit score minimums using the USDA guidelines and a minimum range of 620 to 640.  Even with a marginal credit score, the interest rate will not be increased. 
• Fixed-Rate Loan - the USDA program is solid and does not offer riskier adjustable-rate or hybrid mortgages.  Instead, the 30-year fixed rate is provided, the most popular among mortgage loan programs, and there is no prepayment penalty.
• Availability - the USDA loan program is the least-used conventional or government-backed mortgage in today’s environment, and they are readily available to almost any mortgage lender or mortgage broker.  However, while the lender may have the USDA loan on their rate sheet, they may have little to no experience.  USDA loans are not complicated, but they have their own ‘quirks’ that lenders must know. 

The USDA loan’s ‘Guarantee Fee’ is 1% of the loan amount.  This fee funds the guarantee that compensate lenders if the mortgage should ever default.  The security gives lenders the confidence to extend home financing to those not eligible for conventional financing.
 
How does the guarantee fee work?
The USDA program has two guarantee fees, an upfront fee and an annual fee paid monthly. 

• The upfront guarantee fee on a USDA loan is 1% of the loan amount.  Homebuyers can opt to roll this into the loan amount, preventing out-of-pocket costs.
• The annual fee for a USDA loan is 0.35% of the loan amount.