You want to own your own home. It’s part of the American dream, right?
But saving up that magical 20% for a down payment seems impossible. Even 10% would take years. All you want is a nice, affordable house in the suburbs, or even out in the country.
You might be in luck, thanks to a little-known mortgage program. If you qualify, it could help you buy your dream home with a $0 down payment.
What’s a USDA Home Loan?
The USDA is the United States Department of Agriculture, and one of its main purposes is to support rural development. The USDA home loan program is one of the ways the agency accomplishes that.
The program’s full name is a USDA Rural Development Guaranteed Housing Loan. You may also see it referred to as a Section 502 loan.
USDA home loans offer qualified borrowers a chance to purchase a home with no money down, mortgage rates that are below the market average, and even reduced mortgage insurance premiums.
The program is designed to help people with average or even below-average income buy their own homes, so don’t let that “qualified borrowers” part scare you away. USDA home loans are made to help those who need them, so a less-than-perfect credit score and lower income may be enough to qualify you.
Who Qualifies for a USDA Home Loan?
Like most loan programs, there are some eligibility requirements. Here are the basic qualifications for a USDA home loan:
- U.S. citizenship or permanent residency
- The ability to prove creditworthiness, typically with a credit score of at least 640
- Stable and dependable income
- The ability and willingness to repay the mortgage – generally 12 months of no late payments or collections
- Adjusted household income is equal to or less than 115% of the area median income
The property has to serve as the primary residence and should be located in a qualified rural area, which is defined as an area with a population under 10,000 (or certain areas with fewer than 20,000 people who are underserved with mortgage credit for low to moderate-income families). See if your area qualifies.
There may be exceptions to some of these qualifications based on the standards of individual lenders.
“The main limits are on location and income,” said Miguel Morales, a loan officer with Fairway Independent Mortgage Corporation. “There are also rules for debt to income ratio and minimum credit scores. Most lenders need a 640. My company allows a 620 if we get automated approval and meet all approval criteria.”
The income requirements are pretty straightforward. You probably qualify if you earn less than $86,850 for a household of up to 4 people, or less than $114,650 for a household of 5-8 people. The USDA has an income eligibility calculator you can use to determine if you could qualify for a USDA home loan.
What Do You Need To Know About USDA Home Loans?
If you qualify for a USDA home loan, you should get great mortgage rates and you won’t need a down payment. However, you still need to be ready to cover some basic costs of the loan.
“The main benefit is that [the loan] does not require a down payment, but it does have closing costs,” Morales said. “The seller can often help pay some or all of the closing costs in a purchase scenario. A buyer can get into a home with little money as long as they meet the criteria. They will need funds for the earnest money deposit, appraisal and any home inspections, at the very least.”
An earnest money deposit is basically a “good faith” deposit made to the seller. The deposit, which can be between 1% to 10% of the mortgage, is held in escrow until closing, at which point it’s put towards the down payment.
The average cost of an appraisal for a single-family home runs between $300 and $400, according to HomeGuide. The cost of a home inspection typically ranges from $280 to $390.
These loans also carry a 1% fee, which is paid at closing.
So if you’re looking at a rural home with a cost of $150,000, you may still need to have $1,500 or more for the earnest money deposit and another $650 or so for the appraisal and inspection. Then you’ll need $1,500 for the USDA fee. That’s $3,650. That’s still a lot less than a 20% down payment of $30K, right?
Another thing to consider is that buying a home with a USDA home loan could be a slower process than your typical home-buying experience.
“It can take a little longer to process a USDA loan since the USDA has to approve the loan after the lender has completed their final approval, which would include appraisal review and final underwriting,” Morales said. “So instead of closing a loan in 30 days, it may take 45 days or so to close a USDA loan.”
If you decide to pursue a USDA home loan, be aware that not every bank or mortgage company handles USDA Home Loans. To find one near you, check out the USDA’s list of approved lenders.
The USDA home loan program is targeted to a rather specific set of home buyers. If you’re looking to purchase a home in a rural or suburban area, make less-than-average income, and have decent credit, it could be perfect for you.
Tyler Omoth is a contributor to Codetic.