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6.5. USDA Loans

The U.S. Department of Agriculture maintains a unique home loan program through its Rural Development office. USDA loans are the only other no-down payment loan program on the market. Lenders often require a credit score of at least 620, and a borrower’s income cannot exceed 115 percent of the area’s median income. The home must also be in what the USDA considers a qualified rural area. USDA purchase loans come with both an upfront guarantee fee (1 percent of the loan amount) an annual mortgage insurance premium (0.35 percent of the loan balance).

Best fit for this type of loan: No down payment and no mortgage insurance for borrowers who live in rural areas. See link for areas

How they work: The USDA home loan program is one of the best-kept secrets in the market today.

This zero-down, 100% financing home loans is sponsored by the United States Department of Agriculture to promote homeownership in less-dense communities across the U.S. Don’t let the name fool you… It’s not just for properties that are far-removed from civilization. In fact, a full 97% of U.S. land mass is eligible for USDA financing, representing 109 million people — about one-third of the U.S. population. It’s very likely that a property near you qualifies. Getting a USDA loan program is not much different than getting an FHA loan or a conventional mortgage.

Like FHA, a government agency sponsors the program, but local lenders handle 100% of the transaction. That means your lender does everything from taking your application to issuing the final approval. USDA puts a final stamp of approval on the loan, and even that is handled by the lender.

Pros: No down payment required, and interest rates will typically be lower than Conventional Loans. It is the only loan that allows you to roll all the closing costs into the loan amount if the home appraises for more than the loan amount. In addition as explained above, the Mortgage Insurance is very affordable!

Cons: Upfront guarantee fee of 1% that is rolled into the note. Financing available only for specific rural areas. Take 1-3 weeks longer to close than a standard loan. File must be Underwritten twice. Stricter guidelines on ratios and credit.