There are two government-backed mortgage programs that do not require a down payment. The first one is the VA home loan program. The VA loan doesn’t require a down payment at all and available to those who are eligible. Those eligible include veterans, Armed Forces and National Guard members with at least six years of service, active duty personnel with at least 181 days of service and unremarried surviving spouses of those who have died while serving or as a result of a service related injury. The other zero-down government-backed program is the USDA loan. Here are six things you need to know about this excellent program.
The USDA program is designed to finance properties in rural and semi-rural areas. These areas are designated by the United States Department of Agriculture once every 10 years. As a result of the national census taken every 10 years, the USDA identifies areas that are rural and eligible for the program. When someone wants to finance a rural property with no money down, the potential buyers simply provide their loan officer with the property address. If you’re looking at such a property, take down the address and forward it to me and I’ll see if the property is indeed eligible for this special program.
In addition to location requirements, there are also household income limits. These income limits are based upon the local median income for the area. For households with 1-4 family members, total household income cannot exceed $86,850 per year and all the way up to $212,550 in areas identified as “high cost.” Again, I have the list of these designated areas. For households with 5-8 members, the maximum limit is $114,650 and $280,550 for high cost areas.
USDA loans come with a guarantee to the lender. It’s this guarantee that earns the term “government-backed.” Should a USDA loan go into default and the lender approved the loan with proper USDA guidelines, the lender is compensated for the loss. This compensation comes in two separate forms of mortgage insurance. There is an upfront policy of 1.00% of the loan amount rolled into the final loan and an annual mortgage insurance policy paid in monthly installments. The annual premium is 0.35% of the outstanding loan balance.
Minimum credit scores for USDA loans are set at 640. Each borrower on the application will have three separate scores reported, with the middle score being selected as the qualifying scores. With multiple borrowers on the application, lenders will use the lowest of the middle scores. However, there are instances where lower scores can be accepted as long as the lower scores are as a result of an event outside the responsibility of the applicant. Such events could include an extended illness or a layoff at the applicant’s employer. It can also mean any other event outside the applicant’s control. Contact me directly to explain your situation and together we’ll determine if your situation conforms to this guideline.
USDA loans do ask there be at least three separate trade lines appearing on your credit report such as credit cards or an auto loan. However, with the USDA program, in the absence of three such accounts, lenders can accept rent payments, utilities and other monthly obligations reporting timely payments.
Finally, an eligible property may be located in an approved area that appears like anything but rural. This can happen when an area is deemed rural by the Census Bureau but over time, suburban areas gradually expand to include rural areas in between the time when the census was originally taken and the next one 10 years later.