USDA Loan Down Payment | Here’s What You Need to Know

The USDA loan down payment and the USDA loan program, if it fits your situation, is a remarkable opportunity to save a lot of money when purchasing your new home. The initiative comes from the United States Department of Agriculture (USDA), which may seem strange. However, the loan program is designed to promote homeownership in rural areas of the country. Consequently it’s an opportunity that many potential homebuyers may not be aware of.

USDA loans offer zero down payment. That’s the big headline. It makes the USDA loan one of only two no-down-payment options from government-backed loans. Taking the down payment out of the equation automatically saves potential homebuyers thousands of dollars. (the latest median down payment in the U.S. is $26,000). So how does this work and how do you qualify?

How USDA Loans Work

USDA loans are also known as Rural Development Loans. They are designed to improve the economy and quality of life in rural America, these loans offer eligible home buyers certain benefits not typically available with conventional loans.

• No down payment. That’s a big deal, as most mortgages require large down payments.
• USDA home loans have fixed interest rates.
• The loan term is typically 33 years, meaning you have that long to pay the loan back. This is a bit longer than a typical conventional home loan, making monthly mortgage payments lower.
• USDA loans are designed to help folks with lower credit scores.
• You can use the USDA home loan program to build a new home or buy an existing home. You can also use the funds to rehab, renovate or move an existing home.
• It’s not just for first-time homebuyers; it’s for everyone looking for single-family homes.
• USDA mortgages are assumable. That makes them somewhat unique in the world of mortgages. An assumable loan lets you sign your current mortgage over to a potential buyer without all the paperwork and application process. Moreover, the buyer can assume your loan at the interest rate you locked in when you bought it. That becomes a significant advantage for a seller in a real estate market where interest rates have gone up dramatically.

It’s important to remember The loans are guaranteed and insured by the USDA, while the loans themselves come from private lenders and banks. What’s rural, exactly? The USDA defines “rural” as a town with a population of less than 35,000 people and that includes 97% of the United States. That makes almost everywhere an eligible location for this program.

Requirements and Eligibility

As with most federally sponsored programs, there are some eligibility requirements. The first thing you need to do is check the USDA approved areas for your state. This map is a very important source of information for this process. If you are looking at a house, and you think it may be eligible, check this map.

These are the USDA loan requirements:

• You must be a U.S. citizen, or meet certain noncitizen requirements.
• The home you buy with the USDA down payment assistance must be your primary residence.
• The borrower’s income can’t exceed 115 percent of the median household income of the area in which the eligible house is located.
• These income limits mean you can make too much money to be eligible.

Those are the requirements from the USDA loan down payment and the USDA home loan program itself, but it’s important to remember you also have to get a private lender or mortgage broker on board. They have their own list of requirements.

Not Exactly Requirements for the USDA Loan Program

Because you are working with both a private lender and the USDA, there are some requirements that are not exactly from the USDA but are strongly recommended when it comes to negotiating with a mortgage lender. These include:

Credit score: There is technically no minimum credit score requirement for a USDA loan guarantee, but private lenders like to see scores of 640 or higher.

Stable Income: Lenders typically require that you have stable, regular income for at least the past two years. They will ask you for things like pay stubs from your job and W2 forms for the last two years. All of this is used to help the bank understand that you are a good credit risk and will be able to handle the mortgage payment each month.

DTI: Another number you may see as you are looking at mortgages is DTI, which stands for Debt-To-Income ratio. This is expressed as a percentage. It’s basically a number that represents what you owe each month in debts compared to your income. The USDA has financial requirements around your DTI percentage, although they can be flexible if your credit score is high. The DTI number you will see most often is 41%, meaning your current debts take up only 41% of your net income.

Closing Costs USDA Loan

Like any mortgage, USDA loans do come with closing costs. However, these costs can often be rolled into the loan amount, reducing the upfront out-of-pocket expense. The Consumer Financial Protection Bureau has a great resource that can help you understand more about closing costs.

USDA Direct Loan

The USDA loan guarantees are part of the agency’s suite of Single Family Housing Programs. There are actually two government programs overseen by the agency: one that is a loan guarantee for those with moderate incomes, and one that is a direct loan to low and very-low income families seeking affordable housing.

The USDA Loan program typically refers to their Single Family Housing Guaranteed Loan Program, which we have been describing at length.

The Single Family Direct Loan program is what it sounds like: direct loans from the USDA. This is a rare bird, because the federal government does a lot of loan guarantee programs (VA loans and FHA loans for example), but they rarely directly loan money to people for homes. In this case, the USDA does directly loan you money. These government-backed mortgages are designed for low-income families so they can, in the words of the USDA, “obtain decent, safe and sanitary housing in eligible rural areas.”

Ok, one more thing. It’s not exactly a loan, but you should be aware of it. It may come handy in the future. The USDA also Home Improvement Loans and Grants that provide additional funds for very low income homeowners in an eligible rural area. These grants are funds that do not, in most cases, need to be paid back.

Save an Average of $3,000 with Homes for Heroes

Homes for Heroes has been serving community heroes for more than 20 years. It makes sense that a lot of those heroes – military service members, veterans, firefighters, EMS professionals, teachers and educators, healthcare professionals, and the law enforcement community – will be looking for homes in rural areas. We have a series of blogs that help heroes navigate the world of USDA government agency loans:

• USDA Home Loans for Educators
• USDA Home Loans for Law Enforcement
• USDA Home Loans for Healthcare Workers

We also have a general buyer’s guide for USDA loans.

One of the keys to the USDA loan process is having a mortgage specialist who can help you. We have a network of mortgage specialists who are committed to serving you as a hero. Sign up today to speak with a member of our team to learn more about how we can help you get the mortgage and/or home you want, and save you good money in the process. Then, after you close on your house, we send you a Hero Rewards® check that averages about $3,000.

It’s our way of saying thank you for all of your service in our communities.

 

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