Buying nice homes is not only the right of wealthy people and the ones that live in the urban parts of the country. No matter the income, and no matter the socioeconomic background, everyone wants to own a home they can raise their families in.
That is where the government steps in; giving out mortgage loans to people with a low income.
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RD Loan Meaning
An RD loan is called a Rural Development loan that is financed by USDA, United States Department of Agriculture. RD loans are given to people with low-to-moderate incomes who wish to buy homes in the rural part of the country, these loans come with a zero down payment policy for eligible homeowners.
In 2017, as a part of its Rural Development program, the USDA helped around 127,000 families buy and upgrade their homes. The program is designed to improve the economy and quality of life in rural America. It offers low interest rates and no down payments, and is easily accessible to most borrowers.
How does an RD loan work?
The way an RD loan works is simple, with the zero down payment policy, borrowers can request for 100% coverage of the mortgage and with a low interest rate, it isn’t too hard for most people to pay anyway.
There are three types of an RD loan:
- Direct Loans: This is the type that is issued to people with an extremely low income threshold. The loan is insured by the USDA and the interest rate can be as low as 1%.
- Home Improvement Grants: If low income houses need financial assistance to upgrade their already established homes and renovate them, the USDA provides grants and loans of up to $27,000.
- Loan Guarantee: Even though there is zero down payment, still the loan is guaranteed on a low interest rate too. Unlike a traditional loan, if a borrower doesn’t pay down payment, they don’t qualify for a low interest rate.
What qualifies for an RD Loan?
Luckily, the eligibility criteria for an RD loan isn’t too complicated either. A primary requirement for this is the geographical location. The area should be considered ‘rural’ for you to qualify for an RD loan, should have less than 20,000 people in population and have a lack of available credit.
Other than that a credit score of at least 640 is required, and a borrower must not have any other source of financial aid. Typically, the criteria is as follows:
- Meet income eligibility.
- Live in the home as their primary residence.
- Be a U.S. citizen, U.S. non-citizen national or Qualified Alien.
- Be able to legally obtain the loan.
- Not be suspended or debarred from federal program participation.
- Meet credit obligations in a given time frame.
- Purchase a qualifying property.
Pros and Cons of an RD Loan
While an RD loan sounds like an excellent mortgage opportunity for low income borrowers, there are a few risks to it too. Here is a list of the pros and cons of an RD loan:
- Zero down payment
- Low credit score
- Interest rate as low as 1%
- Flexible loan limits- can borrow as much as $400,000
- Don’t need a perfect credit record
- Upfront guarantee fee is 2% of the total loan amount
- Streamlined refinancing is available- not a very time consuming process
- Not all houses are eligible- only a certain ones that fill the geographical criteria
- Income restrictions
- Refinance restrictions on USDA loans
- Primary residences are eligible- not vacation homes or farmhouses
- Loans are for rate and term refinances and purchases only
- Paying fee for USDA guarantee loan is a must
Like mentioned above, there are certain hidden charges associated with fully funded loans; however, that doesn’t stop people from applying for RD loans. Low income households consider this a golden opportunity to own homes and live there with their families.
The biggest attraction that people have with these loans is that they require zero downpayment and a very low interest rate regardless of the credit history.