USDA No Downpayment Mortgages

First-time homebuyers often receive advice about purchasing residential property. You’ve probably heard that it’s best to hold off buying a home until you’ve saved enough money for a down payment, which could reflect about 20% of the purchase price. However, the U.S. Department of Agriculture offers programs that allow you to avoid this issue. Consider joining the first-time homeowners who have taken advantage of USDA no downpayment mortgages.

What Benefits Can USDA No Downpayment Mortgages Provide?

Rather than a growing family paying rent each month to live in a cramped apartment, homeownership offers an opportunity to build wealth through your property’s increasing equity as you make your monthly mortgage payments. The USDA-backed mortgage programs provide an option to overcome the downpayment hurdle and begin moving a significant portion of monthly housing costs over to equity-building.

A USDA mortgage program could also enable you to obtain an attractive low-interest rate. You may also be able to avoid making payments on a costly mortgage insurance plan. Because applicants do not require a stellar credit score to qualify, USDA no downpayment mortgages can serve as an attractive path toward first-time homeownership.

Why Did the USDA Begin Assisting Homebuyers?

The program's purpose is to offer home loans and development grants for properties located in rural areas. The overall mission is to improve the economy of the communities where lands were once used for farming or other agricultural purposes. The USDA made loans, grants and technical assistance available to buy homes or to make improvements to existing properties in qualified neighborhoods.

The USDA guarantees home loans to low- and moderate-income earners who can afford the monthly mortgage payments in the designated rural areas. The borrowers’ annual income limits to qualify generally depend on the average income of the residents living in the area under consideration.

What Are the Eligibility Requirements for a USDA Mortgage?

Because the USDA no downpayment mortgages are for homes in rural areas, you’ll need to learn about the towns you’d like to move to. Borrowers cannot earn more than 115% of the median household income of the area, adjusted for the number of members in your same-size household.

In most cases, the annual income threshold falls between $103,500 and $136,600. Some individuals buying homes in rural neighborhoods with higher property values may qualify for a larger USDA loan. Regardless of the location and its median income, borrowers need to have proof of income and a minimum credit score of 620.

How Do I Know if a Neighborhood Qualifies for a USDA Loan?

The USDA's economic researchers study the population density of U.S. counties to determine if they qualify for loan programs. Homes qualifying for purchase through USDA no downpayment mortgages generally need to be in counties that are:

Located within a widespread or vacant countryside area
Classified as "rural" with less than 2,500 residents
Not included as part of a large metropolitan labor market area

To learn what locations qualify, review the maps on the USDA's website to see if an area is eligible for rural development home loans.

How Do I Find Out What Type of Loan a Home Qualifies For?

After finding a few potential homes and verifying they’re located within the USDA's eligible areas, you may begin deciding which rural development loan best meets your needs. The government funds USDA no downpayment mortgages from two separate programs, both referred to as Section 502 loans. Each loan has different qualification criteria.

The first program is for USDA Single Family Housing Direct Home Loans. The second program covers USDA Single Family Guaranteed Loans. The basic difference between them is that one is a "direct" loan and the other is a "guaranteed" loan.

Section 502 Direct Loans

With a Section 502 direct loan, the USDA issues funds directly to borrowers and does not require down payments or mortgage insurance. The USDA offers home loans with fixed interest rates and repayment terms of up to 33 years. The mortgages issued reflect borrowers' income, debt-to-income ratios and assets.

Direct loans could go toward purchasing or building new homes, or the funds can cover the cost of repairing existing properties. The guidelines for Section 502 direct loans, however, prohibit:

Buying or building homes larger than the location's norms
Purchasing homes with swimming pools (homeowners may, however, install them)
Using properties for business or commercial purposes

If you qualify for a Section 502 direct loan, you may also apply for assistance to temporarily cover your monthly mortgage payments. The assistance could help offset the costs of moving.

Section 502 Guaranteed Loans

Some borrowers may apply for USDA no downpayment mortgages through their current banks or private lenders. The federal government typically guarantees loans of up to 100% of a home's purchase price when the lending institution provides the funds. The money from the lender could cover purchasing or building rural properties or it may go toward making repairs or improvements on existing homes.

Homes purchased with Section 502 guaranteed loans must meet the U.S. Department of Housing and Urban Development's guidelines for single-family housing, such as:

Condos
Houses
Modular homes
Manufactured homes

If approved, borrowers do not need to provide down payments or obtain mortgage insurance. Section 502 guaranteed loans, however, include an additional one-time fee of up to 2% of the loan's value, which becomes part of the monthly mortgage payments. Most lenders provide 30-year loan terms and may offer varying competitive interest rates.

How Do Homebuyers Apply for USDA No Downpayment Mortgages?

The USDA provides mortgage programs for U.S. citizens or permanent residents with qualifying income and credit scores. Before applying, borrowers must provide proof of income for the previous two years. Credit reports must be free of accounts in collections within the past year.

Applications must show that borrowers and their families do not currently have adequate housing. You may need to demonstrate that your current residence is in poor condition or isn’t safe or sanitary. You could also show that your current home is too small for your family.

You may find yourself on a waiting list or communicating with several potential lenders. We can make things easier for you. Contact us today to learn about the quickest way to apply for USDA loans and other government-backed mortgage programs.