If you're looking for an affordable and obtainable mortgage, don't overlook a USDA Rural Development Loan.
A lesser-known sibling to the FHA home loan program, USDA mortgages come with more restrictions, but also offer certain advantages that FHA loans lack. For example, they're one of the few ways you can still get a zero-down payment mortgage outside of the VA program for military veterans.
Compare favorably to FHA loans
USDA (U.S. Department of Agriculture)Rural Development Loans allow for 100 percent financing, so no down payment is required. Interest rates are comparable to conventional mortgages, although you do have to pay a financing fee equal to 2 percent of the loan amount up front. This fee and certain other closing costs can be rolled into the loan.
There's no mortgage insurance required, although you do have to pay an annual fee equal to 0.3 percent of the loan balance, which is a bit less than you'd have to pay for PMI on a conventional mortgage with less than 20 percent down. This and the upfront fee are paid to USDA to fund the program, which is now designed to be self-sustaining and without direct government funding.
By comparison, FHA mortgages require a down payment of at least 3.5 percent. The upfront fee on FHA loans is only 1 percent, but the annual fee is 1.10-1.15 percent on 30-year loans, depending on the size of your down payment. That can make FHA loans more expensive than a USDA mortgage, though it depends on the interest rate you can obtain for one or the other.
Property, income limits apply
USDA Rural Development Loans have stricter limits on property types and borrower income than FHA mortgages do. As the name implies, USDA Rural Development mortgages are limited to home purchases in rural areas. However, the definition of rural is fairly broad - it includes small towns and the outlying areas of many small-to-midsized cities, so you don't have to buy a house out in the sticks to qualify.
USDA loans are also limited to persons of low and moderate incomes, but those limits vary depending on where you live. The general rule is that household income cannot exceed 115 percent of the median income for your area. In practice, you can earn up to $74,000 in most parts of the U.S. and still qualify, and considerably more in high-income areas.
The USDA offers an online tool here that lets you determine property and income eligibility for your state and county. Under property eligibility, a map shows you what areas are considered rural for purposes of the home loan program. Income limits are not listed up front, but entering your own information will tell you whether you qualify or not, and also show you the specific income limits for your county.
There are no specific limits on how much you can borrow, although program guidelines require that homes purchased must be modest in size, design and cost. Certain features deemed luxuries, such as an in-ground swimming pool, are not allowed. You also have to currently be without adequate housing to qualify for a USDA mortgage, although that is largely a judgment call by local officials.
Extended payments available for lower-income borrowers
If your income is less than 80 percent of the local median, you may be able to take advantage of the USDA's Rural Housing Direct Loan program, which is for low- or very-low income borrowers only. The Direct Loan program offers mortgage terms of up to 38 years on conventional homes or condos, or 30 years on manufactured homes. Payment assistance may be available. The Direct Loan program is available only to those with good credit histories who are unable to obtain credit elsewhere.
Where to apply
USDA Rural Development Loans are available through HUD-authorized lenders, often the same ones that offer FHA loans as well. A list of lenders in your area can be obtained by contacting your local USDA Rural Development Office.