Zero Down Rural Home USDA Loans for Low-Income Borrowers

In this article...
  • Learn about how USDA loans help low-income families live in rural homes by offering low fixed-rate mortgages with zero down. Find out who qualifies for a USDA loan.

When you think about the USDA, food charts, portion sizes and nutrition labels may come to mind. The United States Department of Agriculture’s purview is massive, regulating everything from animal welfare to zoning laws. Did you know that also includes USDA Loans? 

You might be surprised to learn that the USDA offers mortgage programs that help low-income families become homeowners in rural areas. If you dream of retiring to the country but you have limited funds, keep reading to learn more about USDA loans. 

What Are USDA Loans?

A USDA loan is a guaranteed home loan program that helps low-income families purchase or repair homes in designated rural areas by lowering the upfront cost of home buying.  The purpose of USDA loans is to encourage people to buy, build and repair affordable homes in small-town America. The program is backed by the USDA, similar to how the VA backs home loans for Veterans.  

The USDA loan program offers lower rates and down payments for those who qualify, though closing costs are still the same. The three types of mortgage programs that the USDA offers are: 

  • Single-Family Housing Direct Loans: These loans allow low or very-low-income households to purchase or build homes with no money down and payment assistance. 
  • Single-Family Housing Guaranteed Loans: These loans allow moderate-income households to obtain low fixed-rate mortgages with no money down. 
  • Home Repair Loans: These loans allow very-low-income homeowners to obtain the loans necessary to repair or modernize their homes. 

How USDA Loans Work

USDA loan programs assist approved lenders in providing low and moderate-income households an opportunity to own housing as their primary residence in eligible locations. Three primary factors that affect eligibility are:  

  • Your property must be located within a rural area: Qualifying properties are typically located outside city limits, but you should check if your property is eligible by using the USDA’s Property Eligibility
  • You must meet income eligibility: Income requirements are determined by state, city and family size. 
  • You must be a U.S. citizen, U.S. non-citizen national or Qualified Alien: The S. Department of Homeland Security is a valuable resource for learning more about citizenship requirements.  

Once you’ve met pre-qualification requirements, you’ll still need to be approved by a lender. Though USDA loans are a government-backed program, an approved lender will need to determine if you can make mortgage payments on time. Common financial factors a lender will look for are debt-to-income ratios and credit history. The standards are comparatively lenient to traditional mortgages; most lenders require a credit score of at least 640 and a debt-to-income ratio of 43% or lower. 

Is It Hard To Qualify for a USDA Loan?

USDA loans have similar qualification requirements to FHA and VA loans. The strict low-income and location requirements can disqualify many of those who apply. However, the program has more lenient financial requirements concerning credit scores and down payments. Someone living on a fixed income who is comfortable living outside a city may be an ideal candidate. 

USDA Loans Versus Conventional Mortgages 

Unlike conventional loans, USDA loans are backed by the government. The program’s purpose is to ensure low-income households get the help they need to live comfortably and to put money back into rural communities. Though USDA loans are structured similarly to conventional mortgages, there are a few key differences: 

  • Financial qualifications: Banks have higher income and credit requirements, while USDA loans are tailored specifically for low-income households.  
  • Zero down payment: USDA loans are one of the few types of mortgages that offer zero-down financing to those who qualify.
  • USDA Loan fees: Unlike conventional loans, USDA loans include an upfront guarantee fee and an annual loan fee which act like mortgage insurance for the lender if you fail to repay your loan.
  • Appraisal process: Though you should always hire a professional home inspector, USDA loans focus on the liveability and condition of the home more than its future property value. 

Are There Any Downsides to USDA Loans? 

The geographical requirements of USDA loans are not feasible for everyone. If you are accustomed to living close to stores or hospitals or using public transportation, living in a rural community may not be congruent to your lifestyle. USDA loans can only be used for homes that will be the borrower’s primary residence, so you won’t be able to get financing from the USDA to fund a vacation home. 

Should You Apply for a USDA Loan? 

Though a zero-down payment mortgage for a home in the country might sound appealing, it’s not for everyone. It’s important to evaluate your future financial goals with a family member or trusted advisor. Meeting with a reputable lender or real-estate agent who specializes in USDA loans can help you determine your chances to qualify and locate an ideal rural property. 

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