Yes, Zero Down Loans Still Exist

A Quick Guide to the USDA Loan.

By Karina Gafford

What Is It?

A USDA Rural Development Guaranteed Housing Loan Program, otherwise known as a USDA loan, is a mortgage loan that helps families purchase single family homes in more rural areas in America. If you’re a military family currently enjoying big city life up at Fort Hamilton in New York City or Camp Pendleton in San Diego, a case of selective amnesia may have caused you to conveniently forget that your next assignment may bring you to Minot Air Force Base in the less-than-urban region of North Dakota. There’s always a bright side to a PCS, though! If you do receive orders destined for remote regions, a zero down payment, low interest, fixed rate mortgage may help make your military relocation a little easier to endure!

What is It?

The USDA loan exists to promote home ownership in rural communities throughout the US. It also serves to help low to moderate income families with less than perfect credit and low assets purchase a home.

How Do I Qualify for the Loan?

Despite the loan’s roots as a rural program, you won’t need to pick up some hens, sheep, and goats en route to your new abode; you don’t even need farming aspirations to get a USDA loan! A quick review of the USDA rural areas map revealed qualifying new construction homes and townhomes just a few short miles from large towns throughout South Carolina, North Carolina and Washington State.

In order to qualify, the home must be single family, owner occupied, and in a rural area as defined by the USDA. Buyers must show credit worthiness, so if a blip exists on your credit report, you must show concerted efforts to improve credit worthiness over the 12 months prior to applying for a loan. Finally, the mortgage amount, including principal, tax, interest, and insurance, cannot exceed more than 29-percent of your family’s income, but make sure to consult with your individual lender to determine whether they base this ratio off of your gross or adjusted income. Further, when the loan is combined with any additional debts, such as car or credit card payments, the total amount cannot exceed 41-percent of your family’s income.

Can I Have More than One Loan?

For the most part, no, you cannot have more than either one USDA loan or more than one mortgage at a time; however, rare circumstances do exist. For one example, if the USDA defines your other property as inadequate, for instance, if you reside in a mobile home or if your home capacity exceeds local and state occupation limits, then yes, you are eligible for a USDA loan. For another example, if your current home is no longer within commuting distance, then the USDA will permit a loan (hello, military families!). Given the popularity of the VA program’s zero down loan, many military families have not considered acquiring a USDA loan; however, if you currently have a zero down VA loan and are completing a military relocation to a more rural location, then a USDA loan may actually prove more cost effective than any other mortgage option available. 

What are the Advantages?

Obviously, the biggest advantage of the USDA loan is that it requires no down payment, making the loan essentially an anachronism in this post-recession era. In addition to no down payment requirements, borrowers can choose to roll all closing costs into the loan, too, but that’s only if they can’t persuade the seller to cover the closing costs for them. Under USDA loan requirements, seller concessions are permitted, such as having the seller pay for closing costs or receiving credits for new carpets or appliances at closing. Most other loan products have tightened regulations on such practices, but the USDA loan is far more lax. In fact, even gift funding is permitted, which means that bank statements can reveal that a parent or other beneficent donor can gift the borrower funds prior to closing. These funds serve as assets to help further prove credit worthiness.

In addition to requiring no down payment, there are other big advantages to the USDA loan. First, it offers low interest rates comparable to conventional loans and competitive to FHA loans. Second, monthly payments are low as the loan product only exists for a 30-year fixed rate mortgage. Finally, the loan has lower credit requirements than conventional as the loan only requires a credit score of a 640.

What are the Disadvantages?

The appraisal and loan process is pretty strict, but anyone who has closed on a VA mortgage already knows to prepare for some hoops to jump through when dealing with a government loan. In this case, one of the most important factors is that the loan amount cannot exceed 100-percent of the appraised value. Further, only families below a certain income level are permitted to acquire the loans. The specific income amount varies by county, but your family’s combined income cannot exceed 115-percent of the area’s median income. However, there are certain allowable deductions, for instance, if you have high costs for childcare or eldercare; underwriters will take these costs into consideration when calculating your income in relation to the median income of the local area. In addition, the loans are only available for certain homes; the homes must reside in a USDA designated rural area, and non-traditional single family homes, such as condominiums require additional approval.

Despite the great benefits of having a zero down loan, the USDA loan does come with some fee burdens. First, you have to purchase mortgage insurance, just as with an FHA loan. This is called a "Guarantee Fee," which amounts to an upfront 2-percent, but this fee can be rolled into the loan. There is also an annual fee of 0.4-percent, making the fee approximately three times lower than that of the FHA property mortgage insurance. This amount is also rolled into the loan. Just as with the VA funding fee, these fees help guarantee the program’s continued existence for other families.

What Would the Numbers Look Like on This Loan?

For a better understanding of who qualifies, let’s take the example of an O-2 with dependents living in Richland County, South Carolina, near Fort Jackson where the maximum adjusted income is $75,000. We’ll call him Sam. Sam’s base pay is approximately $54,000, and his housing allowance is $21,100, for a combined $75,000, which puts his family’s income at the median level. However, the loan is available for families earning up to 115-percent of the loan, which means that Sam could acquire a USDA loan.

In Sam’s scenario, though, the loan application assumes that Sam’s wife, Susie, is not working. It also assumes that there are no other occupants in the home earning income that could push the family’s income over the approved threshold. The $75,000, however, is Sam’s gross income; it does not account for taxes and other deductions that Sam’s loan agent and underwriter will help him determine. Therefore, even if both Sam and Sally work, given high childcare, transportation, and additional expenses that the underwriter may deduct, the family may still qualify for a USDA loan.

To get a rough estimate of your income numbers, make sure to check out the USDA income eligibility calculator. When you’ve completed a rough estimate, contact a real estate agent who is both familiar with working with military families and who has experience in dealing with USDA loan requirements to try to find your zero down loan in rural America!