USDA Home Loans: How 0% Down Financing Could Help You Buy a Home

You may have heard of USDA home loans and assumed they were only for farms or properties way out in the country.

That’s not really how the program works.

The USDA Single Family Housing Guaranteed Loan Program is designed to help qualified low- and moderate-income buyers purchase a primary residence in an eligible area. One of its biggest benefits is the possibility of 100% financing, which means a qualified buyer may be able to purchase a home with no down payment.

And no, you do not have to be a first-time homebuyer.

That makes USDA financing worth understanding, especially if the amount you have saved for a down payment is one of the things keeping you from considering a home purchase.

How Does a USDA Home Loan Work?

The program most buyers will encounter is the USDA Section 502 Guaranteed Loan Program.

You don’t normally borrow the money directly from the USDA. You work with a USDA-approved mortgage lender. The lender makes the loan, and USDA provides a guarantee that reduces some of the lender’s risk.

For qualified buyers, the program offers 100% financing. USDA guaranteed loans are 30-year fixed-rate mortgages, and the interest rate is set by the individual lender.

That doesn’t mean buying a home is completely free of upfront expenses. There may still be closing costs, prepaid taxes and insurance, inspections, appraisal expenses, and other costs associated with the purchase. Depending on the transaction and loan structure, some eligible closing costs may be financed or negotiated as part of the transaction. Your lender should explain exactly what you would need to bring to closing.

What Makes a Buyer Eligible?

USDA eligibility isn’t based on just one thing.

Your lender will look at your income, debts, credit history, ability to repay the loan, and other underwriting requirements.

There is also an income limit. For the Guaranteed Loan Program, USDA generally limits household income to no more than 115% of the median household income for the area. The actual limit depends on the location and household.

One detail that can surprise buyers is that USDA looks at household income when determining program eligibility. That makes it important to talk with a lender who understands USDA guidelines instead of trying to determine your eligibility from a simple online mortgage calculator.

USDA does not establish a minimum credit score for the Guaranteed Loan Program, although lenders still evaluate credit and may have their own underwriting requirements.

What Makes a Property USDA Eligible?

This is where USDA financing gets interesting.

The home must be located in an area USDA considers eligible. USDA provides an online property eligibility map where you can enter a specific address and see whether it falls within an eligible area.

“Rural” doesn’t necessarily mean what you might picture. Depending on the location, USDA-eligible areas can include communities and properties that are still within reasonable driving distance of larger cities.

The property must also be used as your primary residence. This isn’t a program for buying a vacation home or investment property

Eligible properties can include existing and new homes, and USDA guidelines allow several property types, including detached homes, certain condos, planned developments, modular homes, and qualifying manufactured homes. There is no standard USDA maximum purchase price. Instead, the loan amount depends in part on the buyer’s ability to qualify.

There also isn’t a blanket USDA acreage limit. USDA says acreage should be typical for the area, and the property cannot be primarily designed for income-producing activity.

Being inside an eligible area is only the first step. USDA makes clear that its online map is not a final loan or property approval. The buyer, property, appraisal, lender underwriting, and other program requirements still have to qualify.

What Should You Ask Your Lender?

If USDA financing might fit your situation, I would ask your lender several questions before you start shopping:

• Do I meet the USDA household income requirements?
• What payment and price range would I qualify for?
• What closing costs should I expect even with 100% financing?
• What USDA fees will be part of the loan and monthly payment?
• Are there lender-specific credit requirements I need to meet?
• How long should I expect the USDA loan process to take?
• Are there any property conditions that could create a problem for USDA financing?

A lender who regularly works with USDA loans can help you determine whether the program actually makes sense for your finances.

What Should You Ask Your REALTOR®?

Your agent and lender have different jobs in this process, and you want them communicating with each other.

Your lender determines whether you and the loan qualify. Your REALTOR® can help you identify properties in potentially eligible areas, research the property, communicate with the listing agent, and structure an offer with your financing in mind.

Before getting serious about a particular house, ask your agent to help verify the address on the USDA eligibility map and identify any property characteristics that should be discussed with your lender.

That’s much better than finding a house you love and discovering later that the financing doesn’t work.

Could a USDA Loan Work for You?

If you’ve been putting off buying because you believe you need a large down payment, USDA financing may be one option worth exploring.

It won’t fit every buyer or every property. But for someone who meets the income and underwriting requirements and finds the right home in an eligible area, the ability to finance 100% of the purchase price can make a significant difference.

Start with the financing. Find out what you qualify for. Then we can build the home search around properties and areas that fit both your goals and your loan.

Have questions about USDA home loans or want help finding USDA-eligible homes around DFW? I’m happy to help you make a plan. Visit rob-hurt.com to get started.