It’s no wonder that home buyers, particularly first-timers, are having a hard time. The median sales price for a home was over $420,000 as of the end of the first quarter of 2024. Plus, average 30-year fixed interest rate mortgages are hovering around 7%, per the Federal Reserve.
With fierce competition and five-figure down payments (even the low ones), there’s little leeway for a huge portion of potential first-time home buyers.
Except…
If you’re not too picky about the home and willing to make a few sacrifices, the USDA Rural Development mortgage could help. We do not give enough credit to this loan product that can get you into a home with little to nothing out of pocket.
Introducing the USDA Rural Development mortgage
If you’re trying to buy a home in your favorite city, but can’t quite make the numbers work, check out the Rural Development program. Run by the Department of Agriculture, it’s open to a range of home buyers who need financial assistance. There’s a catch, though, and it’s a deal-breaker for some: The home you buy has to be in a community of under 20,000 people (in a few cases, this extends up to 35,000).
There are actually a few catches, but that’s the hardest one to fulfill. A lot of people don’t love the idea of buying outside the area they know. Plus, many don’t want to accept the perceived downgrade of a smaller town. Even if that small town is well within easy commuting distance of the same city center they’ve known all their lives.
But if you’re ready to leave the city for good, or at least for now, a USDA RD loan could be the solution you’ve been searching for.
How hard is it to get a USDA RD loan?
If you’re willing to buy outside of a city, it isn’t actually all that difficult to qualify for a USDA RD loan. The program has a great deal of flexibility built in to help encourage people to get out there and occupy those smaller population centers. There are income guidelines, with some loans limited to very low or low-income borrowers, and others limited to moderate-income borrowers (up to 115% of the median household income for the area)
However, before you call your favorite lender to get the best mortgage rate on a USDA loan, make sure you understand the rigorous appraisal process. When I was a Realtor, the strict appraisals meant I only dealt with a handful of these loans, even though pretty much all the area immediately outside of my city’s limits qualifies.
Much like the FHA, the USDA looks at more than just the value of the home. The USDA generally requires homes to be between 400 and 2,000 square feet. The living standards requirement may also be difficult for older homes to meet.
Where I live, at one point it was hard to get a USDA loan on a house that wasn’t originally built to USDA standards. This is because of the mismatch between local building standards and codes and USDA quality standards. So, if you’re considering going this route, a good real estate agent experienced in USDA loans will be key.
How does the rate on a USDA loan compare?
There are a couple of different kinds of USDA RD loans, but for the sake of argument, let’s talk about the one that doesn’t have a subsidized interest rate, as this is open to most borrowers. There are subsidized USDA loan rates, but your income has to be very low to qualify.
The interest rates on USDA RD loans are very similar to other 30-year fixed mortgage loans. On June 6, 2024, the week’s average rate for USDA mortgages was 6.712%, according to the Federal Reserve Bank of St. Louis. An FHA mortgage rate for that same period was at 6.703%. It’s not terribly surprising that these two programs are similarly priced, since they’re both government programs designed to make first-time borrowing easier.
By comparison, the 30-year fixed rate mortgage average in the U.S. for the week of June 6, 2024 was 6.99%. Not a huge difference, but a difference. Here’s the total principal and interest you’d pay for each of these loans, assuming you borrowed $250,000 at the rates above:
| Year | USDA RD Loan @ 6.712% | FHA Loan @ 6.703% | 30-year Fixed Mortgage @ 6.99% |
|---|---|---|---|
| 1 | $17,767.04 | $17,750.62 | $18,277.36 |
| 5 | $95,895.94 | $95,207.85 | $98,033.08 |
| 10 | $211,589.29 | $211,393.71 | $217,666.66 |
| 20 | $405,411.54 | $405,036.81 | $417,054.97 |
| 30 | $581,466.75 | $580,929.29 | $598,167.93 |
Data source: Author’s calculations.
Ask about a USDA RD loan
There are a few different programs that will help you get a home with low or no down payment. Your favorite mortgage lender may be more likely to suggest an FHA mortgage, but don’t be afraid to ask about a USDA RD loan. They’re very similar to an FHA mortgage but can be a path to zero down if you just can’t scrape up a down payment.
Living in a small town can really have its perks.
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