The Little-known Mortgage That Doesn’t Require a Down Payment

The Little-known Mortgage That Doesn’t Require a Down Payment

September 9th, 2020 | Government Loans, USDA Loans

A conventional mortgage loan requires a 20% down payment. If you are a first-time homebuyer however, saving up tens of thousands of dollars can seem like an impossible task. Of course, there are loan programs, like FHA mortgages, that allow for low down payments, but they often have stricter requirements. For some of those programs, you may have to pay higher interest rates, have better credit scores, or pay higher mortgage insurance fees.  Fortunately, there is a little-known mortgage loan that requires no down payment and minimal fees: the USDA loan.

USDA Loan Defined

These are mortgages backed by the U.S. Department of Agriculture. They are designed to help low- or middle-income borrowers buy homes in non-urban areas. USDA loans are not actually made by the government; they are made by traditional mortgage lenders but receive a guarantee from the USDA that makes them less risky for lenders.

Loan Features

Beyond offering 100% financing on a home, USDA loans also allow borrowers better interest rates than other low-down payment programs. This is because the USDA subsidizes rates to encourage homeownership in more rural areas. In most other ways, USDA loans are like traditional loans. They are fully amortized (no “balloon” payments), have fixed interest rates and normal closing costs, and they include no prepayment penalties. While they are often used by first-time homebuyers, even repeat buyers can take advantage of them.

USDA loans do require mortgage insurance though. This is insurance that protects the lender against the borrower defaulting. The fees amount to 1% of the loan size at the time of closing plus another 0.35% annually of the remaining loan principal balance. For example, someone buying a home for $100,000 would pay $1,000 in mortgage insurance when the loan closes and another $29.17 monthly thereafter. Even at those rates, the fees are much lower than even with a VA or FHA mortgage.

Eligibility

In order to qualify for a USDA loan, borrowers must:

  • Meet the USDA income caps.
    The caps are set at 15% above the local median salary. For example, if the median income of a community is $60,000, then the maximum income of the borrower could be $69,000.
  • Have a reliable job and income.
    Borrowers will be required to provide tax returns as proof.
  • Have a minimum FICO credit score of 640.
    Some lenders may have slightly different criteria on this point.
  • Have a debt-to-income ratio of roughly 40% or less.
  • Buy a property in a “rural area.
    These are typically defined as places with populations of 20,000 or less.

Qualified Areas

Borrowers can find out which areas qualify under the USDA program by searching the USDA eligibility maps (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=mfhc.)  While the aim of the program is to help stimulate growth in “rural” areas, most of the country actually falls under that definition with 97% of the US map qualifying.  

Although the USDA loan will not suit the needs of every borrower, it is a little-known program that can help many potential homeowners take advantage of low-rates and no down payment.

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American Pacific Mortgage

(NMLS# 301003)
Company NMLS# 1850

1001 W. Tehachapi Blvd., Ste A100,
Tehachapi, California 93561
Phone: 661-822-5523

BRE 012163368 / 01215943 | NMLS 301003
Licensed by the Department of Business Oversight under the CRMLA. NMLS Consumer Access Link
AZ Corp BK 0906702

  • Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act|Licensed by the Dept. of Business Oversight under the CRMLA
  • Corp BK 0906702

© 2020 American Pacific Mortgage Corporation. For informational purposes only. No guarantee of accuracy is expressed or implied. Programs shown may not include all options or pricing structures. Rates, terms, programs and underwriting policies subject to change without notice. This is not an offer to extend credit or a commitment to lend. All loans subject to underwriting approval. Some products may not be available in all states and restrictions may apply. Equal Housing Opportunity.

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