Good Credit but No Down Payment? There’s a Loan for That!

    So, Warren Buffet spends more on dinner than you make in a month, and you’ve never required the services of an investment banker, but you have good credit and you long to own your own home. What if we told you that there is a mortgage loan program out there for people just like you and (here’s the best part) it requires no down payment?

    Despite what you may have been hearing in the media about lenders tightening their belts and mortgage requirements becoming more stringent, the USDA offers a zero-down mortgage for folks who don’t make gobs of money.

    History of the USDA Loan

    In 1944, the Department of Agriculture was reorganized and the USDA Rural Development program was born. It set about providing, among other things, rural housing loans that fell outside the jurisdiction of the farm programs handled by the Farmers Home Administration (FmHA).

    Today, the Rural Development agency makes direct loans, loan guarantees (similar to the FHA-guaranteed loan) and grants to low-to-moderate income families. The loans are used to rehab, build and purchase homes in rural areas.

    Homes Eligible for the USDA Mortgage

    The operative words for this mortgage are “rural development,” meaning that the home must be located within a rural area. To determine if an area is appropriate for the USDA loan, enter the address at the program’s website.

    Here are a few additional requirements:

    The house should be modest for the area in size, design and price.

    The home cannot have a swimming pool.

    The price of the home must be at or below the loan limits for the area.

    The home must meet certain standards set forth by the USDA’s Housing and Community Facilities Program.

    USDA Mortgage Overview

    Breaking down the USDA’s rural development program is a bit confusing as the department uses a numbering system to identify the various loans available.

    If you’re in the market to purchase a home, the USDA program offers two options: a loan guarantee or a direct loan. This is the confusing part: They both fall under the label of the “Section 502 Loan Program.” Your income will determine which loan is best for you.

    Both of the programs are for low-income borrowers, but the guaranteed loan has more flexible income limitations. Both loans are for homes located in rural areas (those with a population of no more than 20,000). If you own a home within 50 miles of the one you wish to purchase, you are ineligible for the programs.

    The Guaranteed Mortgage Loan

    The loan guarantee program, officially known as the Section 502 Guaranteed Loan, is similar to the FHA or VA loan in that the borrower obtains a loan from a lender and the government guarantees its repayment.

    USDA eligibility requirements for the guaranteed loan include:

    Income up to 115 percent of the area’s median income.

    Proof that the applicant can afford to make the monthly payments.

    Reasonable credit history.

    Remember, this is what the USDA wants to see; the lender may have more stringent requirements. You must also agree to use a lender that is approved for single-family housing guaranteed loans. You can find approved lenders on the USDA website.

    The Direct Mortgage Loan

    The USDA program also offers a direct loan, known as a 502 loan. Instead of the borrower obtaining a loan from a lender, the U.S. government makes the loan directly.

    Eligibility requirements for the Direct Loan:

    This loan is reserved for those with low to very low incomes. Those with very low incomes must make no more than 50 percent of the area median income. To qualify as an applicant with low income, you must make between 50 and 80 percent of the local median income.

    Like the guaranteed loan, you must be able to prove that you can afford the monthly mortgage payments, including taxes and insurance.

    All applicants must first apply and be turned down for a conventional loan.

    Borrowers must have a “reasonable” credit history.

    Only U.S. citizens and legally admitted immigrants are eligible.

    The beauty of the direct loan, aside from the fact that you don’t need a down payment, is that the USDA handles the closing, so costs are kept to a minimum.

    Loan terms are for 33 years (very low-income borrowers may be able to stretch the term to 38 years) and the interest rate is set by the lender.

    To find out more about USDA home loans and to see if you qualify, call an agency representative in your state. Contact information is listed on USDA’s website.

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    Doug Goss

    For more than 20 years, Doug Goss has built his real estate business one client, one transaction at a time. The professional representation, personal care and attention Doug provides each of his clients is reflected in their referrals, upon which he has built his enterprise. With a professional network throughout North America and more than 850 sales in the local area, Doug leads one of the country’s foremost real estate teams, The Goss Real Estate Group.

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