USDA interest rates are typically significantly lower than any other program, including FHA, VA, and conventional loans. Because the USDA guarantees a portion of the loan, many lenders feel comfortable providing borrowers with a low interest rate because they know they will be covered should you default on the loan. With loans where there is no guarantee or backing from the government, the lender has to stick its neck out there and hope that you do not default or they are in the lurches for your loan amount. It costs money to repossess a home and resell it, typically for a much lower price than the amount owed on the home, which is why banks must charge higher rates on non-government backed loans.
Individual Factors
Aside from the fact that USDA interest rates are much lower than most other programs, your individual qualifying factors play a role. The lender has final discretion on what rate you will be charged based on the risk level of your loan. For example, if you have a credit score on the lower end (closer to 580), then your interest rate may be higher than a borrower with a credit score of around 700. This is simply because your credit score spells out your financial responsibility – if you have a low score, it probably means that you suffered some type of financial mishap in the past, whether something big like a foreclosure or several late payments throughout the years. The fact of the matter is you are a higher risk and the bank needs to make up for that risk by adding to your interest rate.
Another factor that plays a role in your USDA interest rate is your debt ratio. As a general rule, the USDA does not allow ratios higher than 29 percent up front and 41 percent on the back. There are exceptions to the rule if you have strong compensating factors. However, the closer your ratios are to the guidelines, the higher your interest rate may climb in an effort to make up for the higher risk you pose with the higher debt ratio. Simply put, more debt means more places to split up your income, which could pose a problem if you ran into financial difficulty in the future.
Overall, however, USDA interest rates are considerably lower than any other program. If your income allows you to qualify for this loan program, you will be eligible to receive affordable payments in order to purchase the home you desire in an area that the USDA thinks needs some stimulating in order to thrive.