Interest Rate on Rural Development Loan

Reader Question: Is a rural development loan at a higher interest rate than a regular loan?

I have no direct experience with this type of loan, but I have researched it on numerous occasions for books and articles. So everything I'm about to tell you is based on publicly available information, as opposed to my own personal experiences.

For the benefit of other readers, let me start with a quick definition. A rural development loan is issued by the USDA (the same government organization that sets food regulations, among other things). It is typically for reserved for home buyers in rural areas, and it also has certain income restrictions on it.

The rural development loan is one of the only options for 100% financing these days. In other words, a qualified borrower can use this program to finance the entire purchase price of the home, which eliminates the need for a down payment. That's the whole point of this housing program, to help low-income families in rural areas purchase a home.

When you apply for a rural development loan (and if you get approved), the government will base the amount on your income. They will look at how much you make each year, and then factor about 26% of that income toward the mortgage payment amount.

The interest rate on the USDA rural development loan is based on the rate that the government pays for the money it borrows. Sometimes the interest rate is subsidized (partially paid for) in order to make it even more affordable. So while there are many variables that prevent me from offering a "yes or no" response to your question, I can say that it's possible to get a lower rate on a rural development loan than one made through a private lender.

The main thing is that this program makes home ownership available to certain people who could not otherwise afford it. It's also worth nothing that you would not have to pay mortgage insurance with this type of financing, and that's another big benefit for the people who can qualify for a rural loan.

This program is limited to people in certain geographic areas and with specific income levels. You can find a list of eligible areas on the USDA website.