USDA Loans For No Down Payment Financing

by Bill Gassett on July 7, 2010 · 20 comments

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USDA Loans For No Down Payment Financing

A USDA guaranteed loan is a government insured 100% purchase loan. This type of loan is only offered in what is considered a rural area. They are serviced by direct lenders that meet Federal guidelines.

USDA loans (US Department of Agriculture) aka Section 502 loans are an excellent mortgage vehicle for those home buyers who do not have money to put down but have decent credit ratings. Typically a credit score over 600 will allow a buyer to secure USDA financing. A score between 580-600 will come under much heavier scrutiny but will not rule out the borrower.

Most people think that 100% financing is a thing of the past due to the mortgage market melt down. While it is hard to get 100% financing, it is not impossible because of the USDA loan.

The USDA loan is typically used to help low to moderate income households purchase homes in rural areas. These loan products are backed by the Federal government. A common obstacle for many folks to owning a home is the lack of down payment funds. The use of a USDA loan makes the reality of home ownership far more reachable to a large percentage of borrowers.

Qualifying for a USDA Loan

In order to qualify for a USDA mortgage loan you can only have an income up to 115% of the median income for the area that the home you are interested in buying is located.

The guidelines also include repayment viability based on P.I.T.I (Principle, Interest, Taxes, and Insurance) divided by gross monthly income being less than 29%. Total debt divided by gross monthly income must also be equal to or less than 41%.

Families applying for the loan must not currently have housing that is adequate. The test of adequacy is based on family size. For example ff a family of five is living in a two bedroom apartment then that is not adequate and they would be eligible for the loan. The home must also be reasonable in size based on the size of the family. You would not be buying an enormous home with a USDA loan!

One of the other great benefits of the USDA loan is that there is no mortgage insurance required. Without the need for private mortgage insurance the borrower can save a substantial amount of money!

In my experience, unless you are in a heavily populated city the definition of rural is pretty loose. Many areas that you may not consider to be rural in your mind may qualify for a USDA loan. Areas that have a population under 20,000 will probably pass the test in most circumstances.

To see if a USDA loan would work for your financing needs it would be smart to check with a qualified mortgage professional. Not all lenders work with these type of loan products as they are more paperwork intense.

For additional information on USDA loans I would suggest visiting the USDA loan website which provides a vast amount of information on this loan product..

If you are located in Massachusetts and want to know if you qualify  based on the income limits for a specific area you can visit Massachusetts USDA offices which will provide you with the local income limits based on the county that the property is located in.

If you are located in another state here is the link to the USDA State & local offices.

USDA loan alternatives

USDA Loan vs FHA loan

If you find that you do not meet the income requirements for a USDA loan another popular choice for a lower down payment loan would be an FHA loan. There are no income restrictions with an FHA loan  you will only need to have a 3.5% down payment. For a comparison of conventional mortgage plans to an FHA loan see conventional financing vs FHA loans.

While there have been tremendous changes for the better in the mortgage industry, the media loves to portray the mortgage market as one where borrowers have almost no chance of getting a loan. Doom and gloom unfortunately always seems to sell better than the actual reality of things.

There is no question that mortgage lenders have really tightened their belt and are not lending to anyone that is breathing and walks into their office.  There is however, plenty of funding available to those that have a job with a steady income and a decent credit rating. So don’t assume you can not get a loan!

We are currently in one of the most attractive times in our history as far as borrowing money goes. It is rare to see an interest rate environment where rates are so attractive, combined with a significant drop in housing prices we have seen from 2005 to 2010!

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About the author: The above Real Estate information on USDA loans for no down payment financing was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Worcester and Douglas.

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{ 20 comments… read them below or add one }

Ed Daniels - Metrowest Boston Real Estate July 7, 2010 at 1:31 pm

Bill: Is the USDA program out of the woods on their funding? I thought I was hearing news that this program was either closing off or had a temporary lack of funding in it. I was reading this throughout the 2nd half of last year, but have not heard about it recently. Some towns have agents that talk about the USDA financing in all of their listings, so it is still really popular in some of our Metrowest Boston towns I believe. Great information.

Bill Gassett July 7, 2010 at 4:17 pm

Hi Ed – Currently the government has not extended the program but they expect to come August. There are a couple of local lenders that I know that have private investors that will fund a USDA loan.

Teri Eckholm July 7, 2010 at 8:11 pm

Hi Bill,

Great explanation of the USDA program. It can be used as financing for some properties on the outskirts of the Twin Cities too.

Bill Gassett July 7, 2010 at 8:34 pm

Thanks Teri! The USDA loan is great for a strong borrower that just has not saved enough for a down payment or would rather use their funds elsewhere.

John Caporale July 9, 2010 at 12:53 am

An agent in my office just did a deal with USDA funding. He was as surprised by it as I was him telling me. It was a townhouse. A relatively rural area, but a townhouse nonetheless.

Bill Gassett July 9, 2010 at 12:07 pm

John there are so many folks that do not know about USDA loans. Most people assume you can not get 100% financing anymore. The USDA loan is an excellent program for qualified borrowers.

Lisa Udy July 9, 2010 at 10:16 pm

Hi Bill – I just got word that a lender here in my county is able to fund some rural housing loans. I’m going to write a post about this tomorrow. Great information!

Bill Gassett July 10, 2010 at 7:27 pm

Lisa – The USDA loan is becoming more an more popular as a program for those borrowers with a strong credit history but not much money to work with.

Fred Price August 5, 2010 at 9:40 pm

Great information Bill. We are liscensed and funding USDA here in Florida if anyone needs more specific information or an expert at working with those who need to build their credit to qualify for the USDA RH loan. Regards

Monica Cruz August 9, 2010 at 6:33 pm

My loan officer is telling me there is no way I can get a USDA loan (the guaranteed one, not direct) since funding has run out and I have to get FHA. Is this true?! I have other people I know who are getting their USDA loans funded and I do NOT want to go FHA since our out-of-pocket costs would be higher as well as our payment.

Bill Gassett August 9, 2010 at 11:54 pm

Monica – The loan officer is telling you the truth although there are rumors floating around that the USDA loan financing could be restored at anytime.

John Slocum February 1, 2011 at 4:37 pm

Hello Bill, I just closed a sale where my buyer purchased an REO on 10 acres in Yacolt WA using the USDA loan. With the zero-down, they were able to conserve cash and make some fix-ups and updates that will give them an almost instant boost to their equity. This is a great program!

Kenny Long February 16, 2011 at 3:24 am

Hi Bill,
Thanks for the great info., my wife and I just applied for one of these loans and we were approved, but they said there is currently no funding, and the office was not very helpful or friendly in explaining the process going forward. Are we waiting on the federal or state gov’t and do you know when more info. might be released about funding, or are we just waiting in the dark?

BTW, we are in NW Florida, Destin area…

Bill Gassett February 16, 2011 at 4:02 am

John the USDA loan really is a great program especially for those with limited funds!

Roxanne June 11, 2011 at 2:51 pm

Hi Bill

Very nice write up. There are quite a few state programs in my area as well to help buyers purchase with no money down. With the decline in home prices, it’s really enabled more buyers to consider purchasing. I’m happy to see the state and federal programs coming up to assist buyers in getting into these homes and help clear out the inventory

Carmen November 24, 2011 at 11:43 am

Hi Bill, I live in NJ and am trying to sell my townhouse. My problem is that my townhouse Association is no longer FHA approved. Can a potential buyer use a USDA loan to purchase my townhouse although we’re not FHA approved?
T

Bill Gassett November 24, 2011 at 1:28 pm

Carmen that would depend on whether your development fell into what the USDA considers a rural area. Getting a USDA loan would have no association with being FHA approved or not. Why not get the FHA approval extended though. Without FHA approval it will be a lot harder to sell the units in your place and could ultimately bring down the values.

Carmen November 25, 2011 at 3:52 pm

HI Bob,
Thank you for responding. My townhouse association FHA approval expired 5/31/11 and was not renewed due to the high percentage of residents being delinquent on association fee payments.
Based on the location of my property, Burlington Twp., NJ, it is designated as a rural area by the USDA.
I do have a potential buyer right now but their lender is stating that since my townhouse association is not FHA approved, getting a USDA loan is not an option. I feel helpless at this point.
Any information you can give me is greatly appreciated.

Kristina November 3, 2012 at 8:55 pm

Hi Bill,
My husband and I just got approved for a USDA loan and are waiting on funding. We are purchasing tillable ground with marketable timber/woods and ground to eventually build on. We just signed the approval papers yesterday and the loan officer from the USDA said that while funding should have started already for the fiscal year 2013, it has not, and were told we are 2nd in line for small/beginning farmers loan for that areas USDA location (the first has been waiting since March of this year). There really hasn’t been any questions answered as to when we can close on the property/when funding will be available. I’m sure he is giving us as much information as he knows but the waiting is horrific! We have asked for an extension on the closing date from the property owner, a 60 day extension from the original closing date of Dec. 1, so hopefully the landowner will agree to that. We are worried that this process could take awhile and afraid the landowner will not wait too much longer and may relist the property. Do you have any idea when more funding may come available, partically for Indiana (Southeastern). It’s our first time ever getting this type of loan so forgive me if I sound a bit ignorant. Also, would and could a bank give a temporary loan while we are waiting on funding? I don’t know if that is even legal but its a thought. We love the property so much and hate to loose it because of the long waiting game.

Bill Gassett November 3, 2012 at 10:15 pm

Hi Kristina – I wish I could help answer your questions here regarding your USDA loan but unfortunately have nothing to add about the time frames. I am not sure you will be able to get a temporary loan.

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