The RD (Rural Development) mortgage loan is available to buyers purchasing homes in rural or suburban areas of the country. It requires no down payment, has low interest rates, and inexpensive mortgage insurance in comparison to FHA loans. It is the least recognized loan on today’s market, but it is growing in popularity, especially among first-time homebuyers.
While making a large down payment has benefits, average Americans don’t have 3% to 20% saved for a down payment on a new home. The RD mortgage is great for those borrowers who can afford a mortgage payment but who don’t have a lot of cash reserves at their disposal. These borrowers are possibly recent college graduates who have just begun their careers but who need their savings for other expenses. They might be a growing family who’s just had their first child. Or maybe an individual who had unexpected medical expenses. Borrowers from every scenario can take advantage of the RD loan’s benefits. Even people who have substantial savings choose this loan because they have the freedom to use their savings for home improvements or other moving costs.
While the RD loan is down payment free, there are closing costs due for each loan, regardless of program, before the transaction is complete. Typically these costs are around 3% of the purchase price. RD permits the seller to cover up to 6% of the purchase price in closing costs. The seller doesn’t pay them out of their own pocket, but instead the purchase price is raised to accommodate the closing costs so they are paid out through the life of the loan instead of at the closing table. Other loan programs cap the amount allowed to be covered by the sellers, so it is a relief for buyers to walk away from the closing table with absolutely no money paid up front.
RD loans must be for RD-approved rural homes. “Rural” doesn’t just indicate country landscapes, though; RD mortgage boundaries also often include suburban areas outside metropolitan centers. It is estimated that over 95% of the U.S. terrain falls within rural guidelines. Depending on the state, the majority of land may be RD-eligible. Another added benefit is that the RD loan is allowed on new constructions and foreclosed properties as well as existing homes. There is also no maximum purchase price as long as the buyer can budget the mortgage payment.
The RD loan is only offered by lenders approved by USDA. The RD loan is government-backed which allows for the lower interest and mortgage insurance rates. It is a less risky loan for investors which is why they can loan a mortgage with no money down from the buyer.