USDA Rural Home Loans: Zero Down Payment
by Debbie from Post Falls, Idaho and by Willie from King George, Virginia
Ask Kate about USDA Rural Development Home Loans for repeat and first time home buyers: If a zero down payment, competitive fixed rate for 30 years, affordable Guarantee fee, no mortgage insurance, and never a prepayment penalty sounds attractive, let's discuss a niche program which many home buyers ignore, assuming it is restricted to farm residences.
USDA Home Loans: Designated Rural Area
Before I answer the questions of Debbie and Willie, here are some program highlights to familiarize you with the no down payment mortgage guaranteed by the United States Department of Agriculture (USDA), based on appraised value.
(Most conventional and government-backed mortgage programs are based on appraised value or purchase price, whichever is less.)
Although not all areas qualify for the rural financing, don't be put off by the terms 'rural' or 'USDA'.
Once thought to be financing solely for farmers in rural areas, you may be surprised at the suburban neighborhoods that qualify as a designated rural area.
Borrowers can use the funds to buy a home and even finance the cost of eligible repairs and improvements in some cases.
Maximum Loan Amounts Borrowed
The maximum amount that can be borrowed is capped at $417,000 but cannot exceed your established county (or area) limits, similar to FHA home loans.
Zero Down Payment
Yes, it's true. This is an honest to goodness no down payment mortgage program.
Income Limits and Savings
The USDA Rural Development Home Loan program with no down payment is tailored to borrowers with limited savings and low to moderate income. Total combined household income cannot exceed a maximum 115% of the median income for your area.
Credit History and Scores
Its flexible credit guidelines help many home buyers who otherwise would not qualify. 640 is used as a rule of thumb for a minimum credit score although this is treated with flexibility.
If you want to buy a home after a Chapter 7 bankruptcy, there is a 3 year waiting period (as opposed to much longer for conventional financing) which you can use to re-establish credit. If you are in a Chapter 13, you are eligible to apply within a year assuming your court-ordered payments have been timely.
Mortgage Rates and Terms
All USDA mortgages have 30 year fixed rate terms. Rates are set by lenders who are approved to offer the USDA rural home loan.
Participating lenders also set their own closing costs which can be paid by the borrower with cash and family gifts. Sellers are allowed to pay certain closing costs.
Occupancy and Property Type
Owner occupancy is required but the dwelling may be a single family residence (new and existing), eligible condominium, planned unit development (PUD), modular, or new manufactured housing. No investment properties.
Guarantee fees are similar to FHA mortgage insurance in that they help fund the program. Yet they are more affordable. There are two types of Guarantee fees: Upfront which is financed and Annual which is paid monthly.
To estimate your USDA home loan Guarantee fees, use these calculations.
- Upfront fee: Loan amount x .02 = amount added to loan balance.
- Annual fee: Loan amount X .005 / 12 = amount added to monthly payment.
For example, on a $200,000 loan, the estimated Upfront fee would be $4,000 and estimated Annual fee would be $83 monthly. Always ask your loan originator for exact calculations.
Choosing a Rural Home Loan Lender
This version of the program is the Rural Housing Guaranteed
Loan which means you can shop rates and fees before applying directly to an eligible participating lender of your choice.
Now let's take a look at two questions from home buyers applying for the USDA Rural Home Loan.
Buying a New Home with USDA Home Loan Financing By Debbie from Post Falls
Hi Kate, just want you to know I have learned a lot from your site!
I do have a question however. We had a house built, we were not able to see a model before we built and discovered too late the living area is way too small for me to get around (I have some physical disabilities).
We were just going to deal with it, but then we found out no matter how much we pay we will have the MIP from the FHA loan for a minimum of 5 years.
If we refinance through FHA now or buy, the MIP is forever! We pay 150 a month for it, when that money could be going to the actual cost of the house. (See Debbie's story of buying her first home with FHA financing
We did pay 10% down when we bought it. So we are not upside down, nor do we have any problems (yet) paying, but it just fries me that that money is doing nothing to help us.
We were not given any info on any other type of loans and the last time we bought, these 5 years and life of loan rules were not in place.
We are now looking at selling this house and buying a house with a USDA loan. The program was just renewed here for 6 more years.
How do you feel feel about these loans? My understanding is there is no MIP, but a fractional cost for insurance.
Thanks for your input! And all the help you give people!
***zz-portrait-left.shtml*** Ask Kate answers: Buying a New Home with USDA Home Loan Financing
USDA home loans are great! I offered the program to home buyers whenever possible during my mortgage career because of the zero down payment and affordable alternative to mortgage insurance.
But you should expect to pay Guarantee fees. While more affordable than FHA mortgage insurance, Guarantee fees are both financed and paid monthly in the payment. See above
I saw that you mentioned the USDA Home Loan was renewed for another 6 years in your area. Any home buyers who are contemplating this program should check for availability of funds in their given area before proceeding. Funds do run out from time to time and no home buyer wants to be caught in that situation.
Thank you for writing again and letting me know that you are buying another home. I always enjoy hearing back from my readers.
USDA Mortgage Refinance
Do you already have a USDA rural home loan? Learn how to refinance it for a lower rate with no appraisal, no equity, no credit report, and no debt-to-income calculations at USDA Rural Home Loan Refinances
Pros and Cons of USDA Rural Mortgage By Willie from King George, Virginia
How do you feel about the USDA mortgage?
What are the pros and cons?
***zz-portrait-left.shtml*** Ask Kate answers: Pros and Cons of USDA Rural Mortgage
I like the USDA rural home loan! But it is a niche product which means fewer home buyers will benefit from it compared to other no down or low down programs such as FHA financing
, VA home loans
, and conventional programs.
If the greatest benefit is the zero down feature, I'd say the greatest drawback is having to wait for funds to be replenished once they run out.
It is also important to know that the value of the land alone cannot exceed 30% of the total appraised value. This adds to the restriction of buying in a designated rural area.
But I do not consider these to be serious enough to deter a home buyer from applying for the USDA Rural Mortgage. You just can't beat zero down payment mortgage plans with low interest rates and affordable Guarantee fees as an alternative to expensive mortgage insurance.
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