If you are a first-time homebuyer and plan to live in a rural area, you have a large advantage at your disposal. You may be able to use the USDA Loan Program which provides 100% financing for your home. This means you don’t need a down payment. You don’t even need great credit. It’s a forgiving program that helps first time and subsequent homebuyers own the home they want.
What’s the Catch?
It sounds like there should be a catch, right? You don’t have to put money down on a home. That sounds crazy in today’s strict mortgage industry world. It’s still available, though. This program that the USDA offers is a government-backed program. Here’s how it works.
USDA approved banks can write USDA loans. The bank funds the loan. They must follow the minimum USDA guidelines. However, they can add their own requirements too. This could mean slightly tougher requirements. But, you can shop around to find lenders with less strict requirements if necessary.
Once the USDA approves the loan to be funded, the bank funds it. The USDA then guarantees it. If you default on your loan, the USDA pays the lender back some of the money they lost from your default. This is how the lenders are able to have lenient guidelines, including no down payment.
Why it Pays to Get a USDA Loan as a First-Time Buyer
First-time homebuyers are at a disadvantage. They don’t have the equity in a current home to use to buy another home. This means coming up with a large down payment. While it’s true today that you don’t necessarily need 20% down on a home, you still need a decent down payment. Even 5% of a $200,000 loan means $10,000. Plus, you can’t forget about closing costs, which can cost between 5-6% of the loan amount. Before you know it, you need $20,000 to close your loan including the down payment.
With the USDA loan, you don’t need the down payment. You can borrow 100% of the home’s purchase price as long as the value is as high as the purchase price. You can also wrap the USDA upfront mortgage insurance fee into the loan. This leaves you with the need to come up with the closing cost money. However, if you don’t have it, you can negotiate with the seller to help you pay the closing costs. In reality, you could come to the closing with no money out of your own pocket if you work it right.
Qualifying for the USDA Loan
Before you start shopping for a home in a rural area, there’s one thing you must know. The USDA loan is for low to middle-income borrowers. You can see how you stack up on the USDA website.
What the USDA looks at is your total household income. This means any adult that lives with you and makes money must disclose their income. The total gross monthly income of every person in the household cannot exceed the maximums the USDA set.
Before you panic, know that you get certain allowances for children, the elderly, and the disabled. The USDA recognizes that it costs more money to manage children, the elderly, and the disabled, so they provide allowances accordingly:
- Children $480 (this includes children over 18 but that are in school full-time)
- Elderly $400
- Disabled $480
After deducting your allowed allowances, you have the gross monthly income that the USDA uses to determine eligibility.
Assuming you are eligible, you must then qualify for the loan with just the qualifying factors from the borrower and co-borrower. This means:
- 640 credit score
- 29/41 debt ratios
- Consistent income and employment for the last 24 months
- No defaulted federal loans in your recent past
If you meet these requirements and you are eligible, you stand a good chance to secure USDA financing as a first-time homebuyer.
Where Can You Buy a Home?
There is one last issue you must resolve, though. You have to buy a home in a rural area. Don’t worry, you don’t have to picture yourself out in the middle of nowhere surrounded by nothing but farm fields. The USDA determines the rural boundaries based on the latest census tract. Any area with a population of less than 10,000 that is not within the city limits counts as rural.
This leaves your options for a home wide open. Many people find homes that are just outside of the city lines and would be considered suburban if it weren’t for the census tract. Sacrificing those few miles could mean the difference between needing a down payment and securing USDA financing with no down payment.
If you are a first-time homebuyer considering rural living, consider the USDA loan. It provides attractive terms and lets you secure 100% financing without any money down. It’s a great way to break your way into homeownership.Click to See the Latest Mortgage Rates»