Rates & Affordability

How to Get a Home for No Money Down: Move to the Heartland

Americans living off the beaten path may not know it, but Uncle Sam offers economically struggling rural home buyers a clear path to a new house purchase.

It's called the United States Department of Agriculture (USDA) home loan program, and it offers zero-money-down, 100%-financed home loans to rural Americans. The annual overall USDA budget is $21 billion for 2018, $4.8 billion less than in 2017—the USDA home loan budget comes out of that. Total loan authorizations for 2016 are $24 billion while median loan amounts average $180,000 for the Guaranteed Mortgage Program and $160,000 for the Direct Loan Program.

That's a big deal, given the fact that 97% of the geographical U.S. is eligible for USDA home financing, covering 109 million people—about one-third of the entire U.S. population.

"Next to a VA loan, where you can purchase a home with zero down payment, USDA home loans offer an attractive, low 30-year fixed rate and monthly mortgage insurance that is the lowest around," says Denise Panza, a residential mortgage expert at Prysma Lending in New York City. "Granted there are income limits per county in each state, but those limits are offset by the number of members in the family."

Panza notes that USDA loans can be processed and underwritten and closed within 30 days. "The product is really terrific," she says. "The seller can even pay the closing costs via a seller concession, which really allows a buyer to purchase a home for very little out of pocket money."

What Are USDA Loans?

A USDA home loan is a zero-down payment mortgage for eligible rural and suburban homebuyers which is issued through the USDA loan program, says Jim Quist, founder of Newcastle Home Loans, a private mortgage banking company located in Chicago, IL.

Altogether, there are three USDA loan programs:

  1. Direct Loans
    "These mortgages are for low-income applicants," Quist explains. Loan interest rates in this category can be as low as 1%, but if a loan borrower brings a down payment lower than 20% to the table, that borrower will be subject to PMI—private mortgage insurance.
  2. Home Improvement Loans and Grants
    "These loans permit homeowners to repair or upgrade their homes," Quist says.
  3. Loan Guarantees
    "These loans are the most common USDA loan [and are ] issued by a participating local lender," he says. "They allow homebuyers to get a low mortgage interest rates, even without a down payment."

Who Is Eligible for USDA Home Loans?

To land a USDA home loan, there are several key "upfront" hurdles to clear:

  • You need to be a U.S. citizen or have established permanent residency (with a minimum residency requirement of 24 months).
  • You need to have an acceptable credit history ("with no collections within the last 12 months," Quist states). USDA loan applicants with a credit score of 620-plus will most easily qualify, while those with credit scores below 580 will receive a higher interest rate, notes Kevin Miller, director of growth at Open Listings in Los Angeles. "But even those with no credit history may apply by providing proof of payment to monthly bills."
  • You must agree to a monthly payment—including principal, interest, insurance, and taxes. "The debt-to-income (DTI) ratio for USDA loans is set at "29/41," Miller adds. "This means that 29% of pre-tax income can go towards the monthly mortgage payment. A total of 41% of monthly pre-tax income can be used for all debt, including a mortgage."
  • USDA loans were created by the US Department of Agricultural to help low to median-income families in rural areas to become homeowners," says Randall Yates, founder and CEO of The Lenders Network. "So, in order to qualify, a borrower's total household income cannot exceed 115% of the median income for their city or county."

Borrowers must also purchase a home that is in a USDA eligible location. "That's fairly easy," says Yates. "Pretty much everything 30 miles outside of major metropolitan locations is eligible."

Additionally, the home-in-question must have less than 1,800 square feet in space and hold a market value below the area loan limit, says Miller.

"For example, pricier markets could secure a USDA loan of up to $500,000," Miller explains. You can find the loan guarantee amount by location and discover where USDA loans are available with this USDA loan map.

Also, "you cannot own another home when applying for USDA financing and you must be purchasing a primary residence only," says Panza.

Find out If You're Eligible for a USDA Home Loan

If you're in the market for a new home, and you live in a rural area, a USDA loan may be for you. To apply for a USDA loan, contact a guaranteed loan specialist in your state.

"If your area is eligible, click on the link for income eligibility," advises Jennifer Beeston, vice president of mortgage lending at Guaranteed Rate Mortgage in Santa Rosa, California. "You can also call a lender who can help out. Just make sure a lender checks your income and you get fully preapproved before you start shopping, and make sure the lender you are working with is familiar with USDA language, rules and provisions."

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