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The Little-Known No Down Payment Mortgage from the USDA
When homebuyers are seeking low or no down payment mortgage loans to buy a home, the FHA, Federal Housing Administration, and VA, Veterans Administration, loans come to mind most often. One that rarely gets attention because it is not widely known is the USDA, US Dept. of Agriculture, guaranteed no down payment mortgage.
Even better, this no down payment mortgage can include money to fix up a home for purchase and for closing costs. Because it is focused on helping low to moderate-income buyers in “rural” areas, it is often overlooked by buyers and their mortgage brokers. The surprise for many is that the coverage map at USDA.gov shows that most of the country is eligible for these loans. Unless the home is in a moderate to large size city, the area is probably eligible for the USDA loan guarantee and a no down payment mortgage.
Who Can Apply for a No Down Payment Mortgage?
Qualifying factors in applying for this USDA guaranteed loan program include:
• Household income cannot exceed 115% of the area median household income.
• The buyer must agree to occupy the home as their primary residence.
• The applicant is unable to obtain conventional mortgage financing without PMI, Private Mortgage Insurance.
• The applicant must not be suspended from participation in federal programs.
Millions of potential homebuyers can qualify for this financing if they just make it a goal.
What Properties are Eligible for a No Down Payment Mortgage?
The properties eligible for purchase and a USDA guaranteed loan or no down payment mortgage list in the millions. These are the basic criteria:
• The home must be located within an eligible rural area, which comprises most of the land area in the US exclusive of cities.
• It must be a single-family dwelling, including PUD (Planned Unit Development), attached, detached, condominium, mobile, and manufactured homes.
• The structure must meet HUD 4000.1 standards.
• It cannot have a set maximum selling price based on the repayment ability of the buyer.
• Acreage size must be common for the area.
• There are no loan seasoning requirements; flipped properties are eligible.
The eligible property requirements are very liberal, so many homes are available in areas around the country. Even if a home is not advertised as financeable through the USDA, it is worth checking.
General Applicant Qualifications for No Down Payment Mortgage
There are general applicant qualification requirements or limitations. They include:
• Income: If employed, one year of history is required. If self-employed or a seasonal hire, two years of history required.
• Required assets: No down payment, assets, or reserves are required.
• Credit history: There is no set required minimum credit score. The applicant must show the ability and desire to repay the loan as agreed. Some forms of alternative credit are allowed.
• Monthly housing payment: The total of principal, interest, taxes, insurance, HOA dues, and RD Annual fees cannot exceed 29% of gross monthly income.
• All monthly payments: All monthly payments for credit of all types as on the credit report, including the new mortgage, should not exceed 41% of gross monthly income.
• Seller/interested party contributions: The seller or other interested parties can contribute only up to 6% of the sales price.
• Gift funds: There is no limit on gift funds.
These qualifications are far from limited, and most applicants are usually approved.
Available Loan Product Types for No Down Payment Mortgage
There are several different loan product types available that make this loan guarantee program quite flexible for the borrower. They include:
• Single-Close Loan – The borrower can purchase a new or existing home, as well as build one, with the single-close construction program.
• Refinance – Current USDA loan holders can refinance with a new loan through the USDA to take advantage of lower rates.
• Negotiable Rates – The interest rate for a loan is negotiated between the borrower and the lender but must be a 30-year fixed rate.
• Appraised Value Funding – The loan amount can be extended to 100% of the appraised value of the home, giving the borrower the ability to potentially include repairs and closing costs in the loan.
• Funds Usage – USDA loan funds can be used for:
a. Customary expenses related to the purchase transaction (closing costs).
b. Utility connection costs.
c. Equipment essential to the livability of the home.
d. Site preparation expenses.
e. Escrows for taxes and insurance.
It is no surprise that homebuyers who stumble upon this no down payment mortgage option are finding their path to homeownership faster, smoother, and with little or no cash out of pocket.