If you are planning on buying a home in a suburban or rural area, you may have more financing options beyond a conventional mortgage. The United States Department of Agriculture backs rural development loans to promote and increase economic development and homeownership in areas outside of metropolitan populations. This program can be very beneficial if the property you are looking at qualifies, and many homes are eligible. But how exactly does a USDA loan compare to a conventional mortgage?
Mortgage Down Payment
One of the biggest benefits that a USDA loan offers is that no down payment is required. Because this type of mortgage is backed by the government, lenders can offer 100% financing. Conventional loans require a down payment, typically as low as 3%. However, it is important to note that PMI, or private mortgage insurance, will be required if less than 20% is put down on a conventional mortgage.
Another unique aspect of a USDA loan is that there is an income limit based on the location of the home being purchased. If the income of all of the adults living in the home exceeds 115% of the median income in your area, you will be ineligible under USDA guidelines. There are no income limits for a conventional loan.
Your debt-to-income (DTI) ratio represents the amount of your monthly income that is used to pay recurring financial obligations. In order to qualify for a USDA loan, you should keep your DTI below 45%. While certain lenders have varying requirements, a DTI below 45% is also ideal for a conventional loan.
Credit Score Requirements
In order to be eligible for a USDA loan, you need to have a credit score of at least 640. For a conventional loan, typically a score of 640 is also required. However, a higher score can make lower interest rates and better terms available.
Mortgage Insurance (PMI)
USDA: USDA loans do not require PMI. However, there is an upfront guarantee fee equal to 1% of the financed amount, paid at closing. There is also an annual fee of .35% of the loan’s current balance and is paid monthly. Conventional Loans: We mentioned PMI earlier for conventional loans when a down payment of less than 20% is made. Once you have enough equity in your home, when the balance is 80% of the home’s value, your lender can remove PMI. Until that point it will be included in your monthly payment.
The right loan officer can help you determine which loan is best for you. For over 90 years the experts at Standard Mortgage (NMLS#: 44912) have been helping home buyers and homeowners.