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Zero Down Payment Home Loan Option Explained!

Don’t think of a $0 down home loan as being only for first time home buyers, this loan can work for you even if you have had owned a home before or own one now. Some may think that a $0 down home loan is only for people with challenged credit, and while the loan will help those with a low credit score, it's not intended just for that reason. You may think, well, if it's $0 down, it must be at a higher interest rate, and in fact, this loan is just the opposite. I have seen some of my buyers go with this loan and pay LESS in interest than other buyers of mine going in with the minimum 3% down!

In this blog I’m going to tell you how this loan that can cover ALL your down payment and ALL your closing cost at very aggressive interest rates! You could literally buy a home with less than it cost you to rent an apartment.

What’s really shocking to me, is not a lot of people really talk about this loan, agents in the office and most of my buyers have never even heard of it, so give yourself a hand that you’re doing your research now before buying so you can really see what your options are and what’s out there!

In another blog, I discussed the cost to buy a home, and the MOST EXPENSIVE cost is your down payment with second being your closing cost. For example, on a $200,000 loan you would be looking at $6,000 - $10,000 for down payment PLUS another $6,000 - $8,000 in closing cost! I don’t know about you but that is a chunk of money, and it’s a fact that 8 out of the 10 people reading this don’t have that kind of cash and the other 2 people out of 10 reading this may have an average of $17,000 in savings and it’s kind of scary to give up every penny to the purchase of a house.

You can afford the monthly payment of buying a house, you just don’t have the chunk of money to cover the down payment or closing cost. Well, lucky for us, the federal government came up with a plan and that is where the USDA loan was introduced in 1994 and they now have a loan portfolio of $224.5 billion!

So, what loan am I talking about? A USDA Loan, of course!

When people hear the term USDA, they naturally may be thinking of meat at the grocery store. And while the USDA does inspect the meat at the grocery store, among other things, they also back this amazing $0 down home loans (who knew).

I’m going to talk about what is required to be eligible for a USDA loan, but first, and this is so important, even if you have a lender now, ask if they are a USDA approved lender. If at the end of reading this you think this loan may be best for you and your family, be sure to ask your USDA approved lender if they have ever done a USDA loan before. If they have never done one of these loans, find another lender who has. Trust me, it’s best to have a lender who has done several of these to ensure your loan goes through as smooth as possible!

Let's dig into the 5 requirements to be eligible for this loan.

1. Eligible Rule Area

Directly written from the USDA website, “A USDA loan is a mortgage that offers considerable benefits to those wanting to purchase a home in an eligible rule area”.

This means, if you’re looking for a house in an area that offers a Starbucks and gas station at every red light, odds are it's not going to be in an eligible USDA area.

The USDA looks for ways to bring people into certain areas that only have a population of 35,000 people or less. They look for ways to stimulate the economy in these areas and to do this they offer perks like this $0 down loan to do that. They know having good financing options will bring people in and boost that economy there where they need it.

This creates a win-win for both sides, it helps them boost that area for economic growth and helps the 80% of people who may not have all of the funds of a down payment have a chance at home ownership.

One thing to remember is what may be eligible this year may not be eligible next year. Once they reach this 35,000-population threshold, they move on to another area, and remove that "once eligible area" off the current eligible area map.

With that being considered, the USDA runs on a fiscal year of October 1 through September 30. This is why most big changes to the program happen in October. For this reason, watch for a boundary change on October 1st in 2020. Here is a link to check if the area your looking in is currently eligible.

“The USDA home loans are issued through private lenders and are guaranteed by the united states department of agriculture”. So what this means is you still go to the bank for your loan but kind of like having a co-signer go on the loan with you, instead of your "uncle Bob" co-signing with you, the USDA backs your loan with their guarantee. This means that USDA will reimburse lender if you default on the loan and their guarantee is backed by the U.S. government. "The Guaranteed" does not mean that every borrower’s approval is certain. The USDA backing removes much of the risk from the loan and allows banks and mortgage companies to offer a zero-down loan at incredibly low rates.

Now, looking back at their website, they write: “The purpose for the USDA loan is to provide affordable home ownership opportunities to low to moderate income households to stimulate economic growth in suburban and rule communities throughout the united states”.

2. Income Limits

This brings me to the second requirement for eligibility for this loan. There are income limits that qualify, and I have read the income limits and they are not too far “out of the box” I mean, odds are if your making $150,000+ a year your probably not going to be too concerned about a 100% financing option anyway.

How they calculate the total income is they consider every adult that will be living in the home, and that total gross income of all adults.

All of the adults living in the home don’t have to be on the loan, but their income will need to be disclosed. The income limits are also based off the total number of people living in the home.

Let me give you an example, while every state/county has its own income limits, here in the state of Georgia: 1-4 member household can make $91,650 per year combined. 5-8 member household can make $121,000 per year combined. Before you think you "make more and wont qualify" the USDA does also allow for what they call an “adjusted annual income”.

Acceptable deductions would be things like, medical expenses, verified childcare expenses (day care, after school care, etc.), $480 deduction for each child under the age of 18, $480 deduction for each disabled dependent 18 years old or older, $400 deduction for each eligible applicant or co-applicant aged 62 years or older.

So before you think you don’t qualify, be sure to talk to your lender about all of your available deductions because these deductions could very well get you from not eligible for this loan to eligible.

Just like with everything in life, there are limits, and these limits are to the adjusted income and these deductions. Your max income limits can’t exceed 115% of the median income for your area. Using Georgia again for an example, where you have a 1-4 member household of $91,650 as the combined annual income, that family can't make more than 105,397.50 before deductions. If they make $106,000 per year and have $15k in deductions to get them at the $91,000 mark to be eligible, they are still over the 115% cap and would not be eligible. Check the maximum income limits for your area here:

3. U.S. Citizenship

Third on the list to be eligible for this loan, you must have us citizenship or have permanent residency here in the united states.

4. Primary Home

Fourth eligibility requirement, the home must be your primary home to live in. You can’t purchase a home under this program with the intentions to rent it out or purchase farmland to produce crops or livestock to make money on it. It can’t be an income producing property, you must live there.

5. Credit & Money

Now with the fifth eligibility requirement, let’s talk about your credit, history and money requirements to get this loan. The USDA does not have certain “credit” requirements however remember your getting your loan through the lender, and the USDA is backing your loan, so the lender has a few requirements to get you approved even with the USDA backing you.

The lender will look for a middle credit score of 620-640. Having this score, the lender can typically get everything approved through a system they call GUS, (Guaranteed Underwriting System). This is a generated approval where your lender plugs in your info and it generates your approval though the GUS system. Now, if your score is lower than 620 it does not mean you can’t be approved, it means that the lender won’t be able to submit your information through GUS, and they may have to do more of a manual underwriting to get you qualified for this loan and you may have a higher interest rate than someone with a 640+.

Borrowers who have never used traditional credit may be able to qualify for a USDA loan.

At least 4 non-traditional sources will be needed, such as:

  1. Rental history

  2. Utility payment records

  3. Insurance payments

  • Next, they don’t want to see ANY late payments or collections in the last 12 months prior to your application, so if you apply for this loan in March 2020, you don’t want anything reporting negative on your credit report from Feb 2019.

  • Most lenders, no matter what loan your looking to get have this requirement and that is to be on your job for at least 2 years – now with this, as long as you have been in the same line of work you should still qualify. For example, let’s say you deliver packages for a living and one year you worked at UPS an the next year you worked at FedEx, it’s still the same line of work so that would qualify as 2 years of work history.

  • If you filed bankruptcy – you can qualify after Ch 7 has been discharged for 3 years and 1 year after filing CH 13.

  • Guidelines and policies can vary by lender, so be sure to ask yours, but like with bankruptcy, a foreclosure can negatively affect your credit. However, typically three years after the recorded date of the foreclosure, you can still qualify for a USDA loan.

  • If you had a short sale, you would typically need to wait two years before pursuing a USDA loan.

  • Lastly, your minimum DTI ratios should be below 29 and 41. The maximum DTI ratios would be 34 and 46.

Now that we have discussed what it takes to be eligible for this loan, lets talk about the two fees you must pay to get this loan.

No matter what loan you decide to go with when you buy a home, if you’re not putting a minimum of 20% down, you will have what is called PMI, or “Private Mortgage Insurance” that is added to your monthly mortgage payment. This is a type of security insurance, and even though you pay for it, it does not protect you, it protects the lender in the event you default on your loan and you don’t pay for the home.

  • With USDA, even though they don’t refer to it as PMI, it’s the same purpose and is referred to as an annual fee which is 0.35% (decreased from 0.50% on October 1, 2016). The annual fee is paid monthly in twelve equal installments. For example, on a 250k house, the monthly fee is $72.91. This annual fee stays with the life of the loan and doesn’t just “go away”, however the amount does decrease each year as the loan decreases.

  • In addition to this annual fee that is paid monthly, there is also an upfront fee. With the USDA backing your loan with the lender there is a one-time upfront fee known as The USDA Guarantee fee, which is 1.00% of the loan amount (decreased from 2.75% on October 1, 2016). For each $100,000 borrowed, the upfront fee is $1,000. Let’s say your home loan is 250k, your upfront fee would be $2,500. You can choose to roll this fee in the loan or pay it out of pocket at your closing day.

Compared to other loan types like FHA, the USDA mortgage insurance fees are among the lowest.

Here is an example comparison chart, on a $250,000 house, keep in mind the PMI will depend on the other loans down payment, credit and other factors but as you can see – the monthly PMI for the USDA loan in this example is lower.

Loan Type Monthly Mortgage Insurance Cost

USDA $72.91

FHA $177.08

Conventional $197.92