USDA offers no-down-payment loans in rural areas

Home loan written on blackboard

Low-income homeowners who think they're stuck renting might be able to achieve home ownership through the U.S. Department of Agriculture's Rural Housing Direct Loan program.

This 100% financing program is federally funded, and loan proceeds can be used to:

* Purchase a new home.
* Purchase an existing home that is move-in ready.
* Purchase an existing home and repair or renovate it.
* Purchase a manufactured home.
* Prepare an undeveloped site and build a home on it.

There is no cap on purchase price, but the USDA requires the housing to be “modest in size, design and cost” compared to other housing in the area. The property must become the applicant’s primary residence; secondary and investment properties do not qualify for this financing.

The USDA considers many factors in determining an applicant’s income eligibility, including:

* The number of people in the household.
* The number of people who are under 18 or full-time students.
* Whether any applicant is 62 or older.
* Whether anyone in the household is disabled.
* Annual child care expenses.
* Income from all sources, including employment and investments.
* The median income in the area where the property is located.

Household income cannot exceed a certain percentage of the area's median income for an applicant to qualify.

Applicants also must be living in inadequate housing, which is defined on a case-by-case basis but generally means housing that is not large enough to accommodate all of its residents comfortably or that has health hazards or mechanical deficiencies.

Applicants must also be unable to qualify for other financing.

Principal, interest, taxes and insurance on the home should not be more than 26% of the applicant’s income, but along with 100% financing, subsidies might be available to help qualified borrowers make their monthly payments.

Taxes and insurance must be paid into an escrow account.

Credit score requirements are flexible and less strict than those for traditional mortgages.

Applicants also are allowed to use seller concessions, grant money and gifted funds to pay closing costs.

The loan requires applicants to document their income to show their ability to repay the loan.

Loan terms are 30 years with a fixed interest rate that cannot be higher than 0.6% above market rates.

There is also a loan guarantee fee that is based on a percentage of the mortgage amount. This fee can be rolled into the mortgage; buyers do not have to pay it at closing.

Unlike other low- or no-down-payment loans, there is no monthly mortgage insurance with this loan.

Eligible property locations are those that the USDA defines as rural, which includes many towns with populations of less than 20,000. Federal disaster areas, such as those affected by a hurricane, might also be eligible within three years of the disaster date. Properties in high-risk flood areas are usually not eligible.

Borrowers must apply for this loan through one of 800 lenders that participates in the program.

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