The Zero Down Payment Mortgage Option You’ve Probably Never Heard About

Posted by Laine Smith on 7/13/16 10:14 AM

Topics: Credit Score First Time Home Buyer USDA Loans home buying Down Payment Assistance Mortgage Rates Down Payments

Half of all consumers still consider saving for down payment as a homebuying barrier, according to an Ellie Mae survey. If you’re under the impression that it takes a 20 percent down payment to buy a home, you are more than misinformed. Down payment assistance and multiple low down payment loan options are available, even one that requires zero money upfront. 

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The USDA Rural Development Guaranteed Housing Loan Program, also known as a Rural Development or USDA loan, is an attractive mortgage program for homebuyers struggling to set aside funds for a down payment. On top of 100 percent financing, USDA loans offer several perks unheard of with other loan programs, including:

  • Lower-than-market interest rates. USDA loans are insured by the U.S. Department of Agriculture, which gives borrowers the benefit of a low, across-the-board interest rate that does not vary based on the borrower’s credit score or down payment, as it does with conventional financing.
  • Low monthly private mortgage insurance. Private mortgage insurance, or PMI, is required for any borrower with less than 80 percent loan-to-value. The upside is that the USDA’s PMI rate is one of the lowest among mortgage programs.
  • Flexible credit guidelines. This government-backed loan also allows some borrowers with limited credit histories to qualify for home financing using non-traditional credit tradelines. Payment histories from rent, utilities, cell phone bills, etc. can be used to build a borrower’s credit history.
  • Ability to financing upfront PMI. As with FHA loans, USDA loans also require an upfront PMI premium. The USDA allows borrowers to roll this fee into their financing and close on the loan without putting any money down.

Who Is Eligible for a USDA Loan?

This mortgage program is available to both first-time and repeat homebuyers. Though you don’t have to live in a “rural” area, you must live in a smaller town – typically somewhere with a population of less than 20,000 – to be eligible for a USDA loan. Other eligibility requirements include:

  • Income: Income eligibility varies by state, county and family size. Your household income must be less than 115% of the area’s median income.
  • Debt-to-income: As with any loan, your lender will review your debt-to-income ratio to determine your likelihood of repaying your loan. That PITI (principal, interest, taxes and insurance) of your mortgage must be less than 29% of your gross monthly income. Additional minimum monthly debtpayments, including PITI, can be no more than 41% of your gross monthly income.
  • Home purchase: The USDA will fund a maximum loan amount of $417,000, depending on income of the borrower(s). Rural Development loans cannot be used to finance the purchase of a farm property, second home or investment property.

Eligibility for a Rural Development loan is determined by income, property, credit and location. To see if your location and income may meet eligibility requirements, click here. To learn more about how to get a USDA loan, contact one of our mortgage bankers.

Buying your first home? Our Mortgage 101 Handbook is a great go-to for first-time homebuyers who want to know more about home financing options, common mortgage terminology and the loan process.

Download: Mortgage 101 Handbook

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