No money down home loans are pretty hard to come by these days. But there's still a first-time homebuyer loan that you can get with no down payment. And you don't have to pay mortgage insurance or high interest rates.
It's the USDA Rural Development Loan, which might be termed the "forgotten" mortgage program. Like and FHA or VA mortgage, it's a home loan guaranteed by the U.S. government, but it's one that's often overlooked by many first-time homebuyers.
That may seem strange, because USDA loans offer some very attractive terms. You can get a no money down mortgage (100 percent financing) and not have to pay for PMI or any other type of mortgage insurance. Credit requirements are modest - you can qualify with a credit score as low as 620 - and there is no limit on seller concessions or the use of gifts to cover closing costs.
USDA loans also allow you to bundle in financing to pay for repairs or needed improvements to the property, borrowing up to 102 percent of the "improved" value of the property as part of the mortgage. You can even refinance certain eligible mortgages using a USDA home loan.
No mortgage insurance
You also avoid paying for mortgage insurance, which is normally required on mortgages with less than a 20 percent down payment. Instead, borrowers pay one-time fee equal to 2 percent of the loan amount. That's a lot cheaper than mortgage insurance, which typically runs about one-half to one percent of the original loan amount per year.
All USDA loans are "plain vanilla" fixed-rate mortgages, so you don't have to worry about complicated features like adjustable rates, balloon payments or loans such as adjustable rate mortgages (ARMs). And rates are comparable with what you'd get with a conventional mortgage.
The program does come with certain restrictions. There are limitations on how much income you can have and how much you can spend on a home under the program. And you cannot use it to buy a home in an urban area – they are called "rural development loans" after all. But the definition of "rural" is pretty broad and includes a lot of small towns and suburban areas.
The USDA income limits for a rural development loan are 115 percent of the median family income for the area you're buying in, adjusted for family size. In practice, that usually means a maximum income of $73,000-$92,000, although it can exceed $100,000 in high-value areas, and even go considerably above that in select communities.
USDA eligibility guidelines specify that you must currently lack "adequate" housing, although that is open to interpretation. That can mean a current dwelling that's in poor condition, but it can also be an apartment or house that's too small for your family.
The definition of "rural" under USDA property eligibility guidelines includes small communities of up to 35,000 population – which covers a lot of outlying areas around larger cities. You can view a USDA property eligibility map and get detailing income guidelines on the agency's Income and Property Eligibility page.
Getting a USDA home loan
USDA loans are offered through a limited number of USDA-approved lenders. To find one, check the USDA Rural Development web site for a list of approved lenders near you. You can also find a USDA loan advisor who can help you find the right program for you.
The USDA Rural Development Loan Program actually covers two types of loans, USDA Single Family Direct Housing Loans and the USDA Single Family Guaranteed Loan Program. The eligibility and loan guidelines are different for each, but generally speaking, the Direct Housing Loan program is designed for lower income borrowers and is more limited in what it will finance. A USDA loan advisor, mentioned above, can help you determine which you may be eligible for.
Funding for the USDA Rural Development Loan Program, which comes from the federal government, is limited on a year-by-year basis, and there is often a waiting list to be approved for these loans. But if you don't need to buy a home right away, the USDA home loan program can be a practical and highly affordable first-time homebuyer program.