Do you know that there are still options for home mortgages with zero down-payment? One of those programs comes from an unlikely source, the United States Department of Agriculture (USDA).
Purpose of the USDA Home Loan
Many people mistakenly believe that these loans are utilized to buy agricultural properties, however, that is not the case. The USDA home loan was designed to promote homeownership in rural communities for borrowers in the low to moderate income range. It allows for zero down-payment and is the only loan that will base the loan amount on the appraised value of the home rather than the purchase price. That allows borrowers to even include some closing costs and/or repairs in their loan. For example, if a home appraises at $105,000, but the purchase price is $100,000, closing costs and/or repairs can be added into the loan up to the $105,000 appraised value. Another advantage over FHA loan programs is that it carries no mortgage insurance. There is a funding fee that is paid both upfront and monthly, but typically is lower than that found with FHA loans.
USDA Home Loan Criteria
There are two primary criteria that must be met to determine eligibility for this program. The first one requires that the property be located in an eligible area. This is determined by the USDA maps of allowable “rural” areas which can be found on the USDA Eligibility Website. All borrowers have access to this website and can check eligibility of the property by entering the property address. The maps that are currently being used have not been updated in many years and now include areas that have become well developed in recent years. Recently the maps were updated and are expected to go into effect later this year. Property eligibility is expected to change significantly at that time as more recently developed areas that were previously considered eligible will no longer qualify.
The second component of eligibility is borrower income. Guidelines for categories of low and moderate income that varies by family size and by county are also set forth on the site mentioned above. The site also provides easy steps for determining income eligibility. Simply click on “income eligibility” and complete the questions regarding your state and county, number of household members, their income and any childcare expenses. Regardless of whether or not all income earning family members are included on the mortgage, the entire family income is utilized in determining program eligibility. You can quickly determine whether you meet the income eligibility requirements. Many people mistakenly believe that the program is only for very low income families. However, the USDA Guaranteed Loan Program is also available for moderate income families. As an example, a family of four living in Hillsborough County Florida can earn approximately $74,750 while a household of 5 can earn as much as $98,650.
What types of homes can you purchase with a USDA Home Loan?
The USDA Guaranteed Loan program can be used for existing single family homes as well as new construction, and condominiums and must be used for the borrower’s primary residence. The property must be considered residential property, but can be zoned agricultural. The loan cannot be used for farm acreage where the value of the site exceeds 30% of the total property value. Another often overlooked requirement is that USDA will not finance the value of a swimming pool. While homes with pools are allowable under the program, the appraiser will value the home with and without the pool in order to determine that contributory value of the pool. The USDA will then only lend up to the value of the home, excluding the pool value.
Qualifying for a USDA Mortgage
Many lenders offer the USDA program with FICO scores as low as 580. The allowable debt to income ratio on a USDA loan is typically lower than that allowed under FHA, so borrowers with high debt to income ratios often will not qualify. If you are considering a USDA loan, your lender will determine property eligibility and income eligibility and will review your credit and debt to income ratio to determine whether all qualifications are met.
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