USDA Financial Option

[Juan Rosado]

One of my agents suggested that I apply for a USDA loan to finance my first property. It would be for a suburban area, therefore I could apply for it. Other than the common type of loans (FHA, and conventional) I don’t know much about this type of loan. What are the pros and cons? Shouls I apply for one?

[Phil G.]

@Juan Rosado

1. I assume your agent is referring to a USDA Rural Development (RD) Single-Family Guaranteed Loan program.  There is also a Rural Development multifamily program for affordable housing. The multifamily housing program is competitive, in that funding is limited and USDA awards guarantees based on the merits of the project and availability of funding.  The balance of my remarks are about the single-family program.
2. The program is limited to owner-occupied primary residence.
3. The biggest advantage is no down payment is required.  
4. There is a mortgage insurance program consisting of an upfront fee payment and monthly payments.  The upfront payment can be financed, if the appraisal supports it.  With seller credit toward closing costs, I've been at closing where the buyer needed no cash to purchase.
5. You should check the eligibility of property address.   Not all suburban areas will qualify.  The website to check eligibility is currently down due to the government shutdown.   https://eligibility.sc.egov.usda.gov/
6. There is an income cap, based on geography, and can also be checked on the USDA website.  Based on some offline data I have, and provided just as an illustration, 2018 income caps in the Dallas area is $82,450 for 1-4 person households and $108,850 for 5+ person households.
7. USDA loans can take longer to close than conventional loans.  In a hot market some listing agents and sellers prefer buyers with conventional financing.  The current government shutdown will probably be short, but if you're in a hurry, could be a slight setback.