Want to Buy a Home With No Money Down? Try a USDA Loan
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***j9*** Given the credit crunch and real estate free-fall of the last two years, a no-down-payment mortgage sounds anachronistic, if not downright unbelievable.
But the fact is that thousands of Americans can still purchase a home with no money down, and they don't have to be veterans or military members.
The U.S. Department of Agriculture runs a guaranteed loan program that helps consumers secure affordable financing in more rural parts of the country. The USDA loan program has proved a powerful lifeline for borrowers who might otherwise struggle to become homeowners. (See also: The Different Types of Loans: A Primer)
What is a USDA Home Loan?
A USDA loan is government-backed loan provided to borrowers through the agency's Rural Development program. The loan comes in two varieties — the Guaranteed Loan and the Direct Loan for lower-income households.
The program features flexible credit and income requirements. Borrowers are able to maximize their purchasing power and find competitive rates and loan terms, in part due to the government guarantee that pledges to reimburse lenders in the event of default. Other major benefits of USDA loans include:
- No mortgage insurance required
- No purchase limit
- Competitive 30-year fixed interest rates
Who Is Eligible?
"Rural" can be a misleading term. Borrowers don't have to purchase light years from urban centers. In addition to rural real estate, many qualified USDA homes are within city limits and are usually located in developing areas of the city. This diversity allows potential borrowers a great opportunity to secure a home inside or outside of city limits without high out-of-pocket expenses.
USDA home loans are relatively easy to qualify for. In fact, most borrowers who secure a USDA loan would not have been able to secure a conventional loan due to the strict eligibility requirements conventional loans place on lenders. The USDA home loan program even has a loan, the USDA Direct Loan, to help lower-income households secure financing. To initially qualify for a USDA home loan, potential borrowers must have an income no greater than 115% of the median income for the area and be able to afford the monthly mortgage payments including taxes and insurance.
Although USDA home loans do have flexible eligibility requirements, most USDA-approved lenders will require a mid-range credit score of at least 620 to secure financing.
If potential borrowers doubt their eligibility for a USDA loan, they are still encouraged to apply as those with a history of bankruptcy or foreclosure have qualified in the past.
Veterans and active-duty service members can certainly qualify for USDA loans, but they have access to their own powerful, no-down payment program: The VA Loan Guaranty program.
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First of all, that the government is still doing no-down payment seems to me that we all still have not learned the lessons of the recent housing bubble. Odds are, if you do not have the self discipline to save even a modest down payment, that's a good sign you are not a good candidate for a mortgage. Also people who have no skin in the game are more likely to walk away from a mortgage.
But aside from that, there might be limitations in the fine print. I do not know about USDA loans, but I do know a little about FDA loans. The property my daughter wanted to buy didn't qualify because it had six acres of land, which was too much. The government felt she might profit buy reselling a few acres as a house lot. There was also a penalty if she sold the house within a certain number of years, and she would also not be allowed to rent the house to another individual. For example, if her income changed and she could afford a better house, she would not be allowed to rent the house to a sibling. There were just enough strings to make her feel wary about being locked in for too long to this particular property. Instead she went for a loan that required a few thousand down.
Be careful if you choose to go the Direct Loan route. We got a USDA mortgage 36 years ago, and we still live in the same house today. People DO need a helping hand sometimes, and don't reneg on their obligations. BUT in those days (and I suspect, still today), if USDA determines later that your income and/or credit rating improves, they will call the entire balance and give you 30 days to secure other financing. In our case, it happened 10 years after we bought the house, which also coincided with double-digit interest rates in the 80s. Our house payments tripled. There was a class action suit against USDA and we did finally get our original interest rate back, but with a NEW 30 year mortgage. This, 20 years after we bought the house. Don't get me wrong, there was no way we could have qualified for a mortgage without USDA's help, we just didn't realize they could take it away as easy as they gave it. Read the fine print!