USDA Home Loans: Zero-Down Mortgages For Rural And Suburban Buyers

March 1, 2017 - 4 min read

36% Of Home Buyers Eligible

If you’re among the 36 percent of the population buying houses in rural areas, a USDA Rural Housing mortgage might be your best option — by far.

USDA home loans require no downpayment, come with low-cost mortgage insurance, and you may even qualify for below-market interest rates.

Many rural and suburban neighborhoods are eligible across the U.S. If you are ready to buy a home, consider this little-known mortgage product.

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What Is Rural Housing?

The USDA Rural Housing program was created as part of the Housing Act of 1949 to encourage development in areas that are often less-appealing to mainstream home buyers, says Gene F. Thompson, III, President of InterLinc Mortgage Services in Houston.

The agency’s definition of “rural” may surprise you. According to the 2010 Census, about 97 percent of the US land mass is considered “rural” under one program or another, and this applies to about 36 percent of the US population.

If your property is in a rural area, you should check your eligibility and see if a USDA mortgage could save you some money.

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Advantages Of USDA Home Loans

USDA home loans offer several pluses. The only other mainstream product available that requires zero down is the VA home loan. However, only home buyers with eligible military service can qualify.

Other benefits to USDA home loans include:

  • Flexible underwriting guidelines
  • Cheaper mortgage insurance as compared with FHA
  • Lower mortgage rates as compared with conventional loans

Home buyers who think they can’t qualify to buy a home should look into the USDA loan. They could find that they can buy a home, even if they have been turned down for other loan programs.

Property Eligibility For USDA Home Loans

To be financed with a Rural Housing loan, the property must be located in a “rural” area, as the USDA defines it.

Keep in mind that “rural” includes many suburban neighborhoods just outside of major cities.

It’s easy to determine property eligibility. Plug the address into the field labeled “Find Your Address” on the USDA Property Eligibility Map, and it will tell you.

In addition, the home you selected must be in good condition, a “decent, safe, and sanitary house” without too many repairs needed to make it habitable, says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan. “For example, it wouldn’t be sanitary or safe if the roof leaked,” he says.

You must intend to occupy the home as your primary residence — no vacation homes or rentals are allowed.

Eligible property types include:

  • Single-family residences
  • Modular homes
  • Planned Unit Developments (PUDs)
  • Eligible condominiums (must meet guidelines of HUD, VA, Fannie Mae or Freddie Mac)
  • Townhomes
  • Manufactured homes, although most lenders do not lend on them

You can buy a duplex if you only purchase one half of it. No income-producing components are allowed, including mother-in-law apartments, rental units, or any farming / ranching.

Additionally, USDA requirements state that the home should be “modest” in size, cost, and design.

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Borrower Income Eligibility For USDA Home Loans

USDA home loans come in two varieties — the Guarantee program, in which private lenders fund the mortgages at market interest rates, and the Direct program, in which the government itself lends the money at below-market rates.

To be eligible for the Guarantee, program, applicants’ household income cannot exceed 115 percent of the Area Median Income (AMI). This amount is actually rather generous for an income-based program — you can check your eligibility using this income eligibility tool.

For the Direct program, your income can’t exceed 50-to-80 percent of the AMI and you must be unable to obtain an affordable loan from other sources.

The Direct program is available from the USDA itself, not from mortgage companies and banks as is the Guaranteed program.

Qualifying For Rural Housing Mortgages

The USDA says you’re able to repay the mortgage if your proposed monthly housing expense does not exceed 29 percent of your gross (before-tax) income.

Proposed housing expense includes principal, interest, property taxes, homeowners insurance, and HOA dues, if applicable. Together, these expenses are known as “PITI.”

In addition, your total credit obligations — housing debt plus other account payments — should not exceed 41 percent of your gross income.

However, lenders can approve ratios as high as 32 and 44 percent in certain cases. A credit score of at least 680, plus any one of the factors listed below may get you approved with higher ratios:

  • Your future housing expense does not exceed your current rent
  • You’ll have at least three months of PITI payments in the bank after closing your USDA loan
  • You’ve been continuously employed with your current employer for at least two years

A credit score of at least 640 is deemed credit-worthy, as long as you don’t have:

  • Foreclosure/short sale within 3 years
  • Chapter 7 bankruptcy within 3 years
  • Late mortgage/rent payments in last 12 months

The USDA home loan credit score minimum is 640. Those who have scores below this level should look into obtaining a rapid rescore to remove erroneous or outdated information.

Doing this can raise a credit score fifty or even one hundred points in just a few days.

USDA Mortgage Fees

Each lender will determine its own closing costs, so shop around for the best rate/fee combination.

USDA mortgages do have mortgage insurance, however, and that cost is standard across all lenders:

  • 1.0 percent upfront, which can be wrapped into the loan
  • 0.35 percent per year, which is divided by 12 and added to your monthly payment

In comparison, FHA mortgages have upfront fees of 1.75 percent, and most borrowers pay annual premiums of .85 percent.

What Are Today’s USDA Mortgage Rates?

In many cases, rates for USDA home loans are even lower than those for conventional (non-government) mortgages.

Although Rural Housing loans are backed by the government, their rates are not set by the USDA. It’s up to borrowers to shop with competing lenders and choose the best offer.

Start shopping now by checking today’s USDA rates.

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Barbara Ballinger
Authored By: Barbara Ballinger
The Mortgage Reports contributor
Barbara Ballinger is a freelance journalist and former senior editor for the National Association of REALTORS®. She has co-authored 15 books, interviewed Martha Stewart, and appeared on the Oprah Winfrey Show as a home remodeling expert.