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Zero-Down USDA Mortgages Aren't Just for Farmers

USDA mortgage aren't just for farmers

If you thought USDA loans were just for rural farmers, you wouldn't be the first person to make that mistake.

After all, the program is available through the United States Department of Agriculture, and the Rural Development (RD) office tasked with administering the program was originally called the Farmer's Home Administration.

About half of people looking for a mortgage with Planet Home Lending aren't aware of USDA loans, said Russell Hood, an originator for the Meriden, Connecticut-based company.

It's worth spending some time to see if you're eligible because you might be surprised by who qualifies, he said. If you are eligible, there can be a lot of advantages to USDA loans over other types of programs.

"Those new to USDA (loans) need to be walked through the options," said Hood. "Once educated, everyone is a fan. I love these loans and do at least one a week."

» Expert Tip: Looking to buy soon? Set yourself up for having your offer accepted on a home by getting preapproved for a 0% down USDA home loan prior to your home search.

Not Just for Farmers

The first thing most people learn about USDA mortgages is that they're meant for people in rural areas, and that's true. But it also makes a lot of folks think they won't qualify because they don't consider themselves to be rural residents.

"Rural" is a subjective term, and the definition changes even among different government programs. But for the purposes of USDA loans, "rural" is a surprisingly low bar – chiefly, "any town, village, city, or place" with fewer than 20,000 people that is not located within a Metropolitan Statistical Area. The Census Bureau defines an MSA as one or more counties surrounding a city of more than 50,000 people.

In addition, there's even some wiggle room for certain fast-growing areas so they can remain eligible as a "rural" area for a certain period of time past these points.

Taken together, this means that an estimated 97% of the land mass in the United States counts as "rural" for the purposes of getting a USDA loan, according to a 2011 report, with 34% of the population living in an eligible area. Even outlying suburbs of big cities, like the western portion of Olympia, the state capital of Washington, and parts of Long Island in New York qualify. (You can see if your area is eligible on the RD's property eligibility map.)

Once you find a home, it'll need to meet certain qualifications, said Hood.

"The property qualifications tend to be very similar to other government programs, such as the VA," he said. For example, if your home is on a shared private road, you'll need to have some kind of recorded easement in place.

USDA Mortgages Expand Homeownership

USDA loans are also especially useful for helping people who normally wouldn't qualify to buy a home. Indeed, in order to be eligible for a USDA loan, you must be ineligible for a conventional PMI-free mortgage. To achieve that, you'd need to make a minimum 20% down payment, which isn't realistic for many people.

Indeed, one of the biggest benefits of USDA loans is that you don't need to make any down payment at all.

"When people find out there’s no down payment as an option, it just lights up their faces," said Hood.

You can even roll your loan fees right into the mortgage itself, so that you can get into a qualifying home with basically no cash on hand at all. (A word to the wise – it's always good to keep some savings as a homeowner so that you can afford repairs and maintenance at a minimum.)

In addition to the location and property requirements, there are also income caps to limit access to very-low-income to moderate-income people. Again, those definitions are subjective, but to get a USDA-backed loan from a lender, you can't earn more than 115% of the median household income for your area. For a USDA Direct loan, available straight from the USDA itself, you'll need to be low-income or very-low-income according to your household size and where you live.

In 2021, the average household income for new USDA loan borrowers was $66,105.

» Expert Tip: Check your eligibility for a 0% down USDA home loan

USDA Loans Offer More Favorable Terms

One final reason to look into USDA loans, if you're eligible, is that they aren't as harsh on your finances as some of the other government-sponsored mortgage programs can be. "If the property and the household income meet the USDA standard, it’s a better option in many instances," said Hood.

Most government-backed mortgages charge an upfront funding fee, which is cheapest for USDA loans: 1% of the loan amount, versus 1.4% - 3.6% for VA loans and 1.75% for FHA loans. You'll also need to pay an annual 0.35% fee, but again, FHA loans charge a higher fee of 0.45% to 1.05%.

In addition, USDA loans often offer cheaper rates. Part of this is due to how RD works with lenders to offer USDA Guaranteed loans. It's an unfortunate term because it doesn't mean you're guaranteed to get a loan. Rather, the USDA "guarantees" up to 90% of the loan amount – i.e., should you default on the loan in the future, the USDA will refund your lender up to 90% of the loan amount.

This guarantee doesn't offer anything directly to you, but it does make things cheaper for you in a roundabout way. Because lenders are basically guaranteed to recoup their costs one way or another, they're able to pass on lower rates to you, and that can make for significantly lower monthly payments with USDA loans.

USDA Direct loans may be even cheaper yet, with fixed rates set at 3.25% for low-income and very-low-income buyers as of October 2022, compared with 6.65% for a conventional mortgage. In 2021 the average USDA loan was $178,400, which translates into monthly payments of $837 if you bought a house with no money down – $380 less than if you used a conventional mortgage to buy the same home.

» Expert Tip: Thinking about buying a home but want to secure a good rate? Find a lender that gives you the power to lock an interest rate for an extended period so you can shop around for a home comfortably knowing that your rate is secure and won't go up. Get started here!

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