Last week on the Atlantic Coast Mortgage blog we discussed the USDA Rural Development guaranteed home loan program including what it is and how to qualify. For a quick recap, it offers 100% financing of a home and closing costs.
In essence, the USDA loan may allow you to bring no money to the table when purchasing an eligible home. There are other costs involved including the upfront and annual guarantee fees, but cash isn’t always required to close the deal. Often, you can include your upfront guarantee fee into the loan as well.
At the end of this year, the U.S. Department of Agriculture is even cutting the guarantee fees giving you a bigger break on costs if you qualify.
We briefly touched on the guarantee fees in our last post. Loans that require less money down (or no money down in this case) require a guarantee fee or insurance to protect the company servicing the loan.
The upfront guarantee fee for the USDA loan is currently 2.75 percent of the loan amount, and the annual fee is 0.50 percent of the average scheduled unpaid principal balance.
On October 1, 2016, the upfront fee will be cut to 1 percent, and the annual fee to 0.35 percent. This guarantee fee reduction presents a unique savings opportunity for any home buyer interested in the USDA loan.
Here’s a very basic example of how much you can save with the reduction:
If you have a loan amount of $200,000, the upfront fee currently stands at $5,500. Let’s assume $200,000 is also the average unpaid principal balance just for the sake of this example. In this case, you’ll spend $1,000 for the annual fee or about $83.33 per month.
After the fee reduction in October, the same $200,000 loan will cost you $2,000 in upfront fee instead. The annual fee will be $700 or $58.33 per month.
That’s a significant savings of $3,500 upfront and about $25 per month. A true calculation of the guarantee fees for your home will include unique variables of the situation like the costs you roll into the loan and your amortization schedule. We can help you crunch the numbers if you want to apply for the USDA loan.
The one catch of this loan is your ability to qualify depends on location, location, location. You must purchase a home in a designated rural zone because the purpose of the loan is to provide low- to moderate-income families in rural areas proper housing. But, the new fee savings may present a greater incentive to open up your home search to locations with properties that are eligible for the loan.
The good news is even residents of the D.C. metro area have a shot at getting approved for the USDA Rural Development guaranteed home loan program. There are locations in Virginia and Maryland that happen to be rural development areas where you can purchase a home that fits the criteria. A few of those areas we discuss in our last post so make sure to go back and check it out.
Interested in learning more about your mortgage options or prequalifying for a home loan?