The USDA offers a flexible loan program for borrowers that buy a home in a rural area. These borrowers must be low to very low-income families in order to qualify, while still demonstrating the ability to afford the loan. Because it’s a government-backed mortgage, many people wonder if there is a penalty for paying the loan off early.
No Prepayment Penalty
The USDA does not charge you a prepayment penalty if you pay the loan off early. The USDA also doesn’t require you to live in the home for a specific amount of time. You are free to move as often as you like. There is a small catch, though.
You will have to sell the home and pay off the USDA loan if you want to use USDA financing again. There’s no limit as to how many times you can use the USDA loan. But, there are some restrictions.
Most importantly, you can’t use USDA financing on a second home or investment property. You can only use it for the home you will live in full-time. This is why you must sell the original home you used your USDA financing on if you want to use it again.
You must also meet the following requirements to use USDA financing again:
- You can’t make more than 115% of the average income for your area (this includes your total household income, not just the borrowers).
- The home must be located within the rural boundaries set by the USDA.
- You must meet the USDA guidelines including a 640 credit score, 29% housing ratio, and 41% total debt ratio.
You must also prove that you cannot secure financing from any other program. For example, if you qualify for FHA financing, you won’t be able to use USDA financing.
The Benefits of Paying the USDA Loan Off Early
Why would you even want to pay a USDA loan off early? You have a payment that fits within your budget, why stretch it, right? There are a few benefits of doing so:
- As we said above, you won’t pay any penalties, so it’s worth trying to achieve.
- You will pay less interest on the loan. The less time you borrow the money, the less interest you pay.
- You will gain equity in your home faster, giving you a larger return on your investment.
The USDA doesn’t penalize you for making larger payments than the minimum required payment. As long as you make the minimum required payment, you can always pay more to stay ahead of the game.
The USDA mortgage provides many benefits for low-income families, including the ability to pay the loan off early. Combining that benefit with the no down payment requirement makes this loan a rather flexible option for you and your family.