100% Financing : Fast-Track To Home Buying
The primary struggle for many home buyers is raising funds for the downpayment. Home prices are on the rise. Sometimes, saving for a downpayment is counter-productive: if it takes a year to save up a 5% downpayment, home prices could easily rise 5% during that year. A zero-down home loan can enable a buyer to purchase a home now, instead of a year from now buying at today’s prices saves the struggle of saving for a downpayment, which would only go toward the increased home price anyway.
The USDA loan is one of only two loans that offer 100% financing as a standard guideline. The VA loan is the other zero-down mortgage, and it is only available to those with eligible military experience.
The FHA loan can be made into a 100% financing home loan, with the help of some extra resources. You can get a financial gift to fulfill the FHA-required 3.5% downpayment or you might find down-payment assistance options that can help with the downpayment. The USDA loan stands alone in its ability to completely finance the typical home buyer’s purchase without the extra — and sometimes complicated — process of saving for a downpayment or getting financial help with one.
Additional USDA Home Loan Benefits
Full financing of a home purchase is this program's most notable benefit. But that’s not where the advantages end. The following USDA loan attributes are helping renters become buyers, too.
Low USDA mortgage rates
Small mortgage insurance costs compared to FHA
Further reduced mortgage insurance starting in the fall of 2016
Lenient credit score requirements
Closing costs that can be seller-paid or gift-funded
Many home buyers assume there’s a catch or a “gotcha” included with these benefits. There’s not. But the loan program is reserved to those who need it most. Outside of the geographic restrictions, USDA home loans also have income restrictions — you can’t make too much. The income limits are set by the median income within each geographical area, and also by family size. The maximums are quite generous, as demonstrated by the below example limits based on a family size between one and four persons.
Fresno, California: $75,650 annually
Miami, Florida: $91,050 annually
Richmond, Virginia: $79,800 annually
Bremerton, Washington: $86,950 annually
Families of five or more members are eligible with even higher incomes, and families with income just over the limits may be eligible for income deductions based on USDA guidelines. USDA loan advantages should encourage home buyers to check with their lender, even if they think they are not eligible due to geographic or income restrictions. They could find that they are perfectly suited for this 100% financing home loan program.
USDA Home Loans: Do I Qualify?
USDA loans are easier to qualify for than other loan programs that require a high downpayment. Most borrowers with at least okay credit and a stable source of income should qualify. Here are the specific approval requirements.
Applicants must indicate ability and willingness to meet obligations. This ability is usually determined by past credit history. Lenders want to see a credit profile that shows mostly on-time payments across various credit accounts.
USDA credit score minimum
Applicants need a credit score minimum of 640 to qualify. Home buyers who are just a few points below should consider a rapid rescore to rise above the minimum threshold. Besides the score itself, USDA lenders like 12 months of clean credit prior to your mortgage application including proof of on-time rent payments over the past year.
USDA income requirements
USDA applicants must make enough to comfortably make the mortgage payment each month. Lenders determine comfort level via a ratio of your income compared to debt payments. The stated maximum is 41 percent of income allocated to the future home payment plus any other debt payment such as auto loans and credit cards. For instance, a home buyer making $4,000 per month can qualify with total payments up to $1,640 per month.
Applicants can qualify with an even higher ratio, however, with compensating factors such as a high credit score and a rent payment that matches the proposed house payment.
Lenders prefer a two year history of documentable income and employment, but can make exceptions for new college graduates. A degree in a field related to the applicant’s line of work can be counted as adequate work history.
USDA property guidelines
USDA home loans are for home in which the applicants plan to live. However, you do not have to be a first time home buyer, as long as you own no other adequate housing a reasonable distance from the area in which you are buying. The property must be in a solid, livable condition with no major defects. USDA home loans are not difficult to qualify for, and most lenders in suburban and rural areas offer them. If your lender does not a USDA-approved source, consider finding a lender that is. It’s worth, at the minimum, getting a rate quote and home payment estimate from the USDA lender.