Soon to Return: USDA Zero-Down Mortgage

By:
Peter King - MortgageLoan.com
Zero-down payment mortgages are almost impossible to find these days, unless you’re a veteran who can obtain one through the VA. But that’s about to change, with the revival of another popular zero-down payment program that’s available to non-vets.
 
The U.S. Senate this past week gave final approval to a bill that restores funding for the USDA Single Family Housing Guaranteed Loan Program. Known as Section 502 loans, the program provides for low-cost, zero-down payment mortgages for borrowers with low to moderate incomes.
 
The program has been around for years and has been quite popular, but typically runs out of funding each year, meaning no new loans could be made until the next year’s appropriations are passed. The new legislation, which President Obama is expected to sign shortly, establishes a mechanism to make the program self-funding and available year-round.
 

Fees can be rolled into down payment

 
Under the new legislation, borrowers will be charged a one-time upfront fee of 3.5 percent of the amount borrowed, which will be used to help fund the program. The fee can be rolled into the mortgage itself, however, so borrowers will still be able to obtain their mortgage without having put up a down payment.
 
To qualify, borrowers need to have good credit and meet certain income limits. The maximum income allowed is 115 percent of the local median income, adjusted for household size. Those whose incomes fall below 80 percent of the local median may be able to qualify for other subsidies as well.
 
Private mortgage insurance (PMI) is not required, but the new legislation does allow the USDA to charge an annual fee of up to 0.5 percent of the loan amount, roughly equal to what PMI would cost.
 

"Rural" broadly defined

 
The program will only fund the purchase or construction of a home in a rural area. However, the definition of “rural” is fairly broad – it can include townships of up to 10,000 persons, or even small cities with populations of 25,000 or less.
 
Homes purchased or built with loans obtained through the program must be modest in size, design and cost. The average loan amount under the program is $112,000.
 

Timetable not yet announced

 
The USDA has not announced when it will resume making loans under the program; an announcement to that effect will presumably be issued after President Obama signs the legislation into law.
 
Once the program resumes, the loans will be available through a variety of sources, including state housing agencies, HUD-approved lenders, Fannie Mae and Freddie Mac, any Farm Credit System institution with lending authority, and lenders participating in any other USDA or Farm Service Agency guaranteed loan program.

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