For plenty of would-be homeowners, the down payment is where a home search tends to stall. The USDA loan sidesteps that. Backed by the U.S. Department of Agriculture, it lets qualified borrowers finance up to 100% of an eligible home’s price, which means no down payment. The catch is a list of conditions covering where you buy, how much you earn, and how you plan to use the home.
Not Just for Farmers
The name sounds agricultural, but John Hummel, Head of Home Lending Production at U.S. Bank, counts the belief that these loans cover only farms among the program’s biggest misconceptions. The program supports everyday buyers purchasing a primary residence in eligible rural and suburban areas. Borrowers do not need to work in agriculture, and eligible areas can include small towns and some suburban communities that are not necessarily remote.
How the Guarantee Works
Most USDA mortgages are issued by approved private lenders. What the USDA adds is a guarantee, agreeing to reimburse the lender for up to 90% of the loan if a borrower defaults. That protection lowers the lender’s risk, which is what allows qualified buyers to skip the down payment. These guaranteed loans come as 30-year fixed-rate mortgages, and Bankrate says their rates are comparable to conventional loans.
Who Can Qualify
Qualifying starts with income. For guaranteed loans, household earnings cannot top 115% of the area’s median. The limits shift with household size and location, so the ceiling is higher in pricier areas. Lenders also usually want a debt-to-income ratio of no more than 41%. And the home must be your primary residence, one you plan to live in full time, which rules out vacation homes and investment properties. Borrowers must also be U.S. citizens, non-citizen nationals, or qualified aliens.
What About Credit
The USDA does not set a minimum credit score, but lenders still weigh your credit history. They typically look for at least a 640, and a score at or above that can help guaranteed-loan borrowers avoid a potential full credit review. Jake Vehige, president of mortgage lending at Neighbors Bank in Missouri, says many first-time buyers benefit from the program, since there is no down payment requirement and rates are often competitive.
Two Fees Instead of Insurance
Instead of mortgage insurance, USDA loans carry two fees. In its Sept. 30 article, USA Today listed the upfront guarantee fee at 1% of the loan and the annual fee at 0.35%. On a $100,000 mortgage, that works out to $1,000 at closing, which can often be folded into the loan. The annual fee comes to $350 a year, paid monthly. Both fees can change annually depending on the program’s needs.
Cash You Still Need
A zero-down loan still needs cash at closing. Lender fees, title services, and other transaction costs, including the upfront guarantee fee, generally run 2% to 5% of the purchase price, according to USA Today. Some of those costs can be rolled into the loan. Property taxes and homeowners insurance are handled through an escrow account. Because the guarantee protects the lender, the amount you qualify for is not necessarily the amount you can comfortably afford.
Finding a Lender
Bankrate housing market analyst Jeff Ostrowski calls USDA loans “very much a niche market,” and many of the biggest mortgage lenders do not offer them. Buyers in rural areas might have to try extra hard to shop around, he says, but it is worth the effort. Start by checking an address and your household’s income limit on the USDA website, then compare lenders, since rates, fees, and requirements vary.
Beyond the Standard Loan
USDA direct loans come from the agency’s Rural Development Service Centers instead of a private lender, serving low- and very low-income households that cannot get a loan elsewhere. They carry lower interest rates, and terms run up to 38 years for very low-income borrowers. Repair loans, according to Bankrate’s June 12 article, top out at $40,000 for lower-income owners, while very low-income homeowners aged 62 or older can get grants of up to $10,000 to remove home hazards.
How It Compares
Next to the alternatives, the USDA route asks for the smallest down payment. FHA loans call for at least 3.5% down and conventional loans 3%, though FHA has no geographic limits. John Hummel says USDA financing can suit buyers in eligible smaller or suburban communities who have stable income but little saved. For those buyers, a niche program like this one may turn out to be the loan that fits.
