Home buying with no down payment
One of the biggest barriers to homeownership is the required down payment.
That roadblock doesn’t exist with USDA loans.
You only need to find a home in an eligible location — which is currently about 97% of U.S. land mass.
Have no money to buy a home? This mortgage solution could be your ticket to homeownership.
In this article (Skip to...)
- How USDA works
- Down payment
- Closing costs
- USDA-specific costs
- Tips to pay closing costs
- Check your eligibility
How the USDA loan program works
USDA home loans are guaranteed loans backed by the U.S. Department of Agriculture’s Rural Development Loan Program.
This loan option is designed to get low-to-average income families into homeownership in rural areas. You can qualify for a USDA loan with no down payment.
This is one of only two major products requiring no down payment. The other is the VA loan, for which you need eligible military service.
Unlike most standard home loans, the USDA loan is not a conventional mortgage backed by Fannie Mae or Freddie Mac.
Because the USDA home loan program is guaranteed by a government agency, lenders can often offer below-market mortgage rates.
USDA home loan program eligibility
In order to qualify for a USDA loan, you will have to meet both the program’s household income limits and purchase a home in an eligible rural area.
Keep in mind that income limits will vary by both location and the number of persons in your household.
As an example, in 2021, the USDA’s household income limits varied widely between Chattooga County, Georgia and Aurora, Colorado.
- 1-4 person household: $114,850
- 5 or more person household: $151,600
- 1-4 person household: $91,900
- 5 or more person household: $121,300
Further, many first-time homebuyers are surprised to see just how many homes are located in eligible rural areas. An estimated 97% of the U.S. land mass is considered rural by the USDA.
Explore USDA income limits for your area here.
Other basic USDA eligibility guidelines
- Minimum credit score: No minimum is established, but often 640 with most approved lenders
- Credit history: Credit report should show no late payments or recent foreclosures or bankruptcies
- Income requirements: Income limits vary by region and number of persons in household. Typically, your income must be less than 115% of the area median income (AMI)
- Employment requirements: History of steady income and employment. Self-employed borrowers are eligible, too
- Property requirements: Must be a single-family home located in an eligible rural area that will be your primary residence
- Loan term: USDA only offers 30-year fixed-rate mortgages
USDA down payment requirements
In addition to lower-than-market mortgage rates, the appeal of a USDA loan is that a down payment is not required. And the USDA mortgage insurance is cheaper than many other low-down-payment loan programs.
However, bringing a down payment to closing will reduce your monthly mortgage payments, which can be a big savings over the life of the loan.
Use a USDA loan calculator to estimate how much you can save with and without a down payment.
Regardless of which option you choose, you’ll still need to cover closing costs.
However, for home buyers who want to buy with as little out-of-pocket expenses as possible, there are a few common strategies to reduce USDA loan closing costs.
How much are USDA closing costs?
USDA closing costs are generally on par with other major loan programs: about 2-5% of the home loan amount on average. On a $300,000 USDA home loan, you might pay around $6,000 to $10,000 in closing costs. Of course, these can vary a lot by lender and location.
But the overall amount you’ll pay at closing is a lot less with USDA, because you don’t have to bring a down payment to the table.
USDA mortgages require no down payment. Compare that to an FHA loan for which you need 3.5% down, and a conventional loan that requires 3-5% down.
For a $200,000 home loan, the following down payments would apply.
|Loan Type||% Down||Down Payment|
Even though 0% down is required, you will still need to come up with closing costs, which could total thousands of dollars.
Closing costs come in two categories:
- Costs to acquire the loan and transfer title
- Expenses associated with the property
Typically, costs to acquire a USDA home loan and the property vary by lender and company, which expenses tied to the property don’t change no matter where you get a loan.
What do USDA loan closing costs cover?
When you purchase a new home with a USDA loan, you will be responsible for a number of fees at closing.
Some of these closing costs are faced by all borrowers and first-time home buyers who are in the process of qualifying for a mortgage loan.
However, your approved USDA lender will also charge fees specific to the USDA rural development loan program.
Furthermore, USDA loan closing costs can vary by provider.
Standard closing costs
Whether you’re refinancing your current USDA loan or securing a purchase loan, some expenses are required whenever you submit a loan application.
Below are common fees that you can expect to see included in your closing costs.
Loan origination fees
Typically, 0-1% of the loan amount. Your lender will charge an origination fee to process and underwrite your loan application.
“Some lenders have a flat fee, while others have percentages,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO. “You can ask your lender if there is any wiggle room.”
Sometimes called loan application fees or processing fees, your Loan Estimate will reveal various in-house fees that are specific to your mortgage lender.
The good news is that sometimes underwriting fees, and many other closing costs, can often be negotiated. So speak with your loan officer about rebates and discounts.
A home appraisal is generally part of the loan application process — though there are exceptions.
A professional appraiser will establish the value of the property, based on an inspection of the home, local real estate market conditions, and comparable sale prices in your new home’s area.
Essentially, the appraisal fee covers the expense of verifying the property’s fair market value to ensure it matches the home’s purchase price.
Credit report fee
This fee covers the cost of pulling your credit reports from the major credit reporting bureaus to establish your credit score.
Also known as mortgage points, discount points are an optional closing cost. When you buy, or pay, discount points at closing, you are basically paying money upfront to lower your loan’s interest rate.
Some borrowers use discount points as a strategy to reduce their monthly payments, which can save a substantial amount of money over the life of the loan.
Although, your specific savings will depend on how long you plan on living in the home before you sell or refinance.
Title insurance protects your mortgage lender against claims or liens against your new home’s title.
As a home buyer, you may pay this fee as part of your closing costs, but sometimes the seller will absorb the cost of title insurance on behalf of the buyer.
This fee is paid to the escrow or title company to set up an escrow account that will hold your earnest money and other funds that may pass between you and the seller.
The recording fee covers the expense to have your local government agency, often the County Recorder’s Office, update public recorders with new ownership details.
Costs specific to USDA home loans
There are two additional costs that are unique to USDA’s rural development loan: the guarantee fee and the annual fee.
USDA home loans feature what is called a guarantee fee, sometimes called a funding fee.
The guarantee fee is typically equal to 1% of your loan amount. This can be paid upfront, however most borrowers roll it into their loan balance to avoid the extra fee at closing.
While not a closing cost, USDA loans do carry an annual fee for mortgage insurance that is generally around 0.35% of the loan amount.
The annual mortgage insurance charge will be broken into 12 separate payments and included on your monthly mortgage bill. So this will not affect your closing costs.
Costs specific to the property
Certain expenses are required any time you own a home. When you get a mortgage, the lender will require that you prepay a certain number of months of these expenses.
They do this to ensure that your new home is not in jeopardy of being seized by the government, in the case of unpaid taxes, or at risk of being destroyed with no insurance.
- Property taxes: typically around 1% of the property value per year
- Homeowner's insurance: $500-$1,000+ per year, depending on home value
The lender will typically require a few months’ worth of both property taxes and homeowners insurance to be paid upfront at closing. These are put into an “impound account” and paid out to the insurance company and tax authority by your lender when due.
Although the amount of upfront taxes and insurance varies by state, typical prepayment amounts might range from:
- 4-8 months of property taxes
- 12-14 months of homeowner’s insurance premiums
For instance, your home value is $200,000 and your property taxes are 1% per year. Plus, your homeowner’s insurance premium is $600 per year. The lender would collect approximately:
- $1,000 in prepaid taxes (6 months)
- $700 in prepaid insurance (14 months)
After collecting the fees, the lender sends payment to the county tax office and your insurance company. They handle these payments to ensure the items are paid in full.
Expenses like a home inspection and home warranty are a good idea, but not required or collected by the lender.
Use these strategies to pay for closing costs
The good news is that you don’t have to pay USDA mortgage closing costs out of your own pocket.
Take out a bigger loan
A little-known USDA guideline says you can take a bigger loan amount to pay for closing costs, if the appraised value is higher than the purchase price. For instance:
- $200,000 sale price
- $205,000 appraised value
- $5,000 extra loan amount available
Other ways to pay closing costs are as follows.
In some real estate markets, the seller can “kick in” extra money for closing costs.
Seller credits are typically available when a motivated seller is not getting many offers on the home.
“If you know that you will need more funds for closing costs, you could make an offer for $10K over, with a $10K seller credit,” adds Meyer. “This is a very common strategy many of my clients use.”
The lender can raise your interest rate slightly and credit you the extra profit from that higher rate. For example:
- 4.0%: No lender credit
- 4.25%: $3,000 lender credit
That money can be used for all lender, title, escrow fees as well as property taxes and insurance
Gift funds allow you to receive financial assistance from a family member, employer, or other eligible sources to pay all or part of your closing costs.
Check your USDA eligibility
USDA financing removes traditional barriers to homeownership. Many home buyers must come up with a down payment and closing costs, but USDA buyers eliminate a big part of that total.
Check your eligibility for this zero-down mortgage and be on your way to homeownership.