Many buyers are aware of government loan programs such as those offered by the Federal Housing Administration (FHA) and Veterans Administration (VA), but most don’t know about one of the best programs out there: the United States Dept. of Agriculture’s Guaranteed Rural Housing (USDA GRH) program, which allows zero-down-payment purchases on properties in certain areas, including many that you many not think of as rural.

USDA loans have many advantages over their FHA and VA counterparts, as well as over conventional low-down-payment loans using mortgage insurance (MI). Specifically:

• No down payment required: unlike FHA loans, USDA allows true 100% financing
• No monthly mortgage insurance: also unlike FHA loans or conventional MI loans, USDA loans have no monthly mortgage insurance premiums.
• No reserve requirements and no minimum credit scores: USDA loans are very flexible in their underwriting as long as the total picture makes sense; if your income is good, though, they don’t have any arbitrary cutoffs in terms of total assets or minimum credit scores that you need to have.
• No maximum loan amount. (Note, however, that there are some effective loan amount limits, which we’ll get into below.
• No limitation on source of closing costs: 100% gifted closing cost or down payment assistance is allowed; charity, or similar housing assistance from community based organizations may be used; and soft second mortgages are allowed for closing costs even if the total debt exceeds the appraised value of the property.
• No limit on seller concessions to pay for closing costs and/or repairs.
• Closing costs and repairs can be rolled into your loan if your appraisal is higher than the sales contract price.

So what are the downsides of the USDA loans?

• They do have a household income limit. The specific amount varies from county to county and on the size of your household; in DC, MD, and VA, the limits for 2009 range between about $73k/yr (for a single-person household in certain counties in Virginia) to upwards of $121k/yr (for households of 5 or more people in certain counties in Maryland).
• They are only allowed in areas that fit the USDA’s definition of “rural”. That definition is pretty broad, however, and while Washington DC itself as well as the immediately DC-adjacent counties in Virginia are excluded, portions of suburban counties such as Montgomery, Howard, and Prince George’s counties in MD and Loudoun and Prince William counties in Virginia are eligible (as are the majority of the rest of those states outside of the immediate area of cities such as DC, Baltimore, and Richmond).
• They are only for people purchasing a home to live in as their primary residence and who won’t own any other real estate at the same time. If you currently own other real estate, you must sell it by no later than the date that you close on your USDA loan, and you can do “simultaneous closings” where you sell one house and purchase another house and have settlement for both transactions occur on the same day, so you can use USDA mortgages to “move-up” to a new home, but you can’t use them to hop from home to home and build an investment portfolio. (FHA and VA mortgages dohave provisions that allow a borrower to keep real estate that they currently own while using those mortgages to purchase new real estate, as long as the borrower is planning on living in the newly-purchased property, and thus can in some circumstances be used to help a budding investor acquire multiple properties over the years.)
• They are only available to borrowers who wouldn’t otherwise be eligible to purchase a property. These loans aren’t designed for borrowers who have, say, hundreds of thousands of dollars in cash or other investments but who want to take advantage of the opportunity to buy a property with zero down payment so their other investments can stay invested; they’re meant for people for whom purchasing a home otherwise just wouldn’t be possible, and since the USDA funds that guarantee these loans are limited, the underwriters do reject applicants if they believe that the borrowers are trying to “game the system” and use up USDA funds that might otherwise help someone who absolutely needs one of these loans to make a purchase.

Want to know more about USDA mortgages? We’d be glad to talk to you about your situation, including showing you how to find out whether a specific property is or is not in an area that qualifies for USDA financing.

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Tags: usda, zero-down