If you want to buy a home in a designated rural area, and you meet income guidelines, you may be able to get a mortgage with no down payment through the USDA program.
A USDA home loan, also known as a Rural Development Loan, is a government-issued mortgage that allows you to buy a home with no money down. Qualified buyers can receive 100% financing, with closing costs financed into the mortgage or paid by the seller. USDA loans typically have very competitive interest rates, and the mortgages always have a fixed rate.
The USDA program was created in 1991 to boost homeownership in rural areas. The program allows for the purchase, refinance, renovation and repair of a home. Many city dwellers may take advantage of a USDA loan as an incentive to relocate.
USDA loans can be somewhat tricky to qualify for, because not only must the borrower qualify, but the property must qualify as well.
Advantages of a USDA Loan
- 100% financing available. The only other major program that offers 100% financing is the VA program for veterans.
- Closing costs may be rolled into the loan.
- Less stringent credit requirements than most loans. Borrowers with bankruptcy or foreclosure on their credit file may qualify, as well as borrowers with limited credit history.
- Competitive interest rates.
- USDA loans are designed for lower-income borrowers.
Downsides of a USDA Home Loan
Despite the advantages, a USDA loan is not for every borrower. The income requirements are capped based on median income in the area the home will be purchased. The home must also be located in an approved rural area, according to the USDA. This creates a small box for borrowers to fit into, although those who do meet the qualifications will enjoy a low fixed-rate loan with no down payment required.
Do I Qualify for a USDA Home Loan?
To be eligible, you must meet the following requirements:
- The home must be in a designated rural area according to the USDA. However, some properties are eligible even if they are located outside of rural counties.
- The loan is for a primary residence, not a farm or second home.
- Your PITI (mortgage principal, interest, taxes, and insurance) does not exceed 29% of your monthly income. All monthly debt, including credit card payments, do not exceed 41% of your income.
- A credit score of around 640 is desired, but exceptions can be made.
- Maximum income requirements vary by family size, state and county. You must have adequate income to pay the loan, but not so much income that you would have no trouble with another mortgage product.
There are two forms of USDA loans: a direct loan and a guaranteed loan. Each has unique eligibility requirements. A direct loan is made by the USDA, and it is designed for low-income borrowers with a household income that is less than 80% of the region's median. A guaranteed loan, on the other hand, is made by a third party (such as a bank) with a broader income range. Guaranteed loans require the borrower's household income is less than 115% of the region's median.