Zero-down payment mortgages have pretty much disappeared these days. But here's a secret - there's still a zero-down mortgage that's readily available to most borrowers. And you don' have to pay mortgage insurance or high interest rates.

It's a 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 lenders and mortgage brokers.

Zero-down payment financing

That's strange, because a USDA rural development home mortgage offers some very attractive terms. You can get 100 percent financing (no down payment) and pay no private mortgage insurance (PMI) on the loan! 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.

In addition, you can also 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.

No PMI requirement

You also avoid paying private mortgage insurance (PMI), which is normally required for mortgages where the borrower puts less than 20 percent down. Instead, the borrower pays an upfront fee equal to 2 percent of the loan amount. Since PMI has an annual cost typically equal to about one-half of one percent of the loan balance, you'll come out ahead with the USDA loan if you stay in the home for four years or more.

All USDA loans are "plain vanilla" fixed-rate mortgages, so you don't have to worry about more complicated loans such as adjustable rate mortgages (ARMs). And rates are comparable with what you'd get with a private market loan.

So what's the catch? Well, the program is designed for "rural" loans, which many assume means farming areas. But in reality, the loans are generally available in areas outside of city limits - the townships where many people are now choosing to live.

Rural doesn't necessarily mean cows

"Rural" areas include small communities of up to 10,000 people - which covers a lot of outlying areas near larger cities. The USDA makes it easy to identify what areas are eligible, offering detailed maps of qualifying areas on the USDA Rural Development Income and Property Eligiblilty web page.

Like other government guaranteed loans, the program has income limits on borrowers. The limit is 115 percent of the median family income for the area you're buying in, although that's adjusted for family size. In practice, that typically means an upper income limit of $73,000-$92,000, although it can exceed $100,000 in high-value areas, and even go considerably above that in select communities.

To obtain a USDA mortgage, you need to go through a USDA-approved lender. However, approved lenders may be difficult to find. Many lenders have not qualified for the program, even though the requirements are no more onerous than those for an FHA-approved lender. A lender may have to apply for USDA approval in order to process your loan. However, the process is fairly straightforward, so it shouldn't be a huge burden for the lender.

With lenders tightening credit, it's hard to get a standard mortgage with a minimal down payment. If you're in a position where you can handle a monthly mortgage payment but don't have a lot of cash on hand for a down payment, a USDA guaranteed mortgage might be just the solution for you.

100% financing

No monthly mortgage insurance

No asset or automatic reserve requirements

Gifts allowed for closing costs

Required property improvements can be financed into the loan up to 102% of the "improved" value. (USDA will allow repairs to be completed after closing!)

Eligible USDA property types include single family homes, condominiums and manufactured housing*. USDA does have some income and property eligibility requirements.

Even though a mortgage insurance premium is not required, USDA charges a 2% funding fee to guarantee the mortgage. This fee may be financed into the loan amount.

Published on February 27, 2010