USDA Loans Are Great! Right?

The government is trying to help me right? Sort of.

The whole idea is that if you’re qualified as ‘low-income’ and the house you’re looking at meets certain guidelines, the USDA will finance and subsidize your loan up to 100%!

Great!? No. Think about this: there’s a 2% fee that must be paid upfront (but you’re financing 100% so you don’t have any cash anyway) that will more than likely be rolled into the loan. “Okay, well, that’s not so bad.” That is, until you try to sell the home, pay it off, refinance or make improvements.

When any of these events occur you are subject to a subsidy “recapture” event. Therefore any subsidy that the government has provided, must be paid back upon closing/terminating the loan.

On a home valued at $100,000 you’d have (based on many factors, but in general terms) a subsidy of around $160 a month. If you sold ten years later with a gain in value (for round number sake) $10,000 plus your equity you’d owe the government at closing a little over $14,000 or 50% (capped) of your equity.

So after 10 years of home ownership you walk away with around $13,000 after additional fees, etc.

Overall, if you didn’t have to give up half of it, that’s a net gain of $216 a month. But you don’t get it all, you get $108. If you stuck $100 a month in a savings account earning 1% you’d get the same amount. And NO ONE considers savings accounts a good investment, so is a home with a USDA mortgage loan a good investment? No.

If you need a subsidy, you can’t afford it. Save your money, invest it wisely and THEN you can buy a house. The wise know how to wait. Please be wise.