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Buying a rural home? U.S. Department of Agriculture loans offer a combination of rates and fees that can beat conventional loans and even Federal Housing Administration-insured loans (FHA loans).
USDA loans are for low- to moderate-income repeat and first-time borrowers in rural areas. They allow borrowers to buy homes without a down payment. Bonus: The government's definition of "rural" includes suburbs in some places.
How a USDA loan can save you money
The USDA mortgage program is one of the few that lets you get 100% financing for a home.
“The lower USDA guarantee fees are the equivalent of getting a break on the interest rate.”
You pay guarantee fees on a USDA loan whether or not you make a down payment. There's an upfront fee, paid at closing, and another fee paid monthly for the life of the loan. Guarantee fees are paid in lieu of mortgage insurance.
The good news: USDA guarantee fees are cheaper than FHA or private mortgage insurance. The lower fees are the equivalent of getting a break on the interest rate.
If you're buying a rural home, here’s how to get the best combo of USDA mortgage rates and fees.
» MORE: What is a USDA loan?
1. See if you and the home qualify for a USDA loan
USDA loans are for single-family, owner-occupied homes in rural areas. The department has a rural property lookup tool that lets you enter an address to find out whether the home is eligible for a USDA loan.
Manufactured homes, also called mobile homes, are eligible if they are new, the owner owns the lot, the home is on a permanent foundation and it is taxed as real estate and not as personal property. There is limited eligibility for manufactured homes that aren't new.
The USDA establishes limits on household income for borrowers. The income limits vary by county and metro area. There are two ways to search income limits:
2. Make sure your credit reports are correct
Before you apply for a mortgage, check the accuracy of your credit reports. Lenders look at your credit records when deciding whether to give you a mortgage. You may request a free credit report annually from the three main credit bureaus. If you spot inaccuracies, here's how to dispute the credit reporting errors.
“There is no minimum credit score for USDA loans, but the underwriting process is automated if you have a credit score of 640 or higher.”
The accuracy of your credit reports is also important because your credit score is based on that information. While there is no minimum credit score for USDA loans, the underwriting process is automated if you have a credit score of 640 or higher. Also, the lowest USDA loan rates go to the borrowers with high credit scores.
3. Find lenders that provide USDA loans
USDA mortgages are available from national, regional and local lenders. NerdWallet's list of the best USDA lenders is arranged by borrowers’ situations, such as those with weaker credit, those who want an online experience and those who want the best customer service.
The USDA maintains a list of USDA lenders, while cautioning that the list doesn't include every one of them.
» MORE: How much house can you afford?
4. Compare rates for the three types of USDA loans
USDA Rural Development loans come in three types:
Guaranteed loans. With a USDA guaranteed loan, you get a mortgage from a private lender. The USDA guarantees the loan, protecting the lender from losing a bundle should you eventually default.
Direct loans. With a USDA direct loan, the federal government subsidizes your monthly payment while your income remains at or below the area's low-income threshold. These loans are for low- and very low-income borrowers who otherwise would not have access to mortgages. USDA loan rates on these loans are lower than the rates on regular, unsubsidized mortgages.
Housing repair loans and grants. If you already own a home in a designated rural area and have a very low income, you can get a loan at 1% interest to repair, improve or modernize the home or to remove health and safety hazards. If you are age 62 or older and have very low income, you could be eligible for a grant to remove health and safety hazards.
5. Get Loan Estimates for USDA, FHA and VA loans
If the home meets the location guidelines and you meet the income guidelines for a USDA loan, ask lenders to give you Loan Estimate forms for a USDA loan and an FHA mortgage. If you are eligible for a U.S. Department of Veterans Affairs loan (VA loan), ask for a Loan Estimate for a VA loan, too. Then compare the loan offers for the best combination of interest rate and fees.
By shopping around, you can save hundreds or even thousands of dollars on mortgage closing costs in addition to finding the lender with the lowest USDA loan rates.
HOW TO GET THE BEST USDA MORTGAGE RATE
Find out if you and the home qualify for a USDA loan.
Make sure your credit reports are accurate. If not, take steps to correct them.
Search for lenders that provide USDA loans.
Choose which of the three types of USDA loan you need. Then compare interest rates.
Compare Loan Estimates for USDA and FHA loans (and for a VA loan if you're eligible).