A little-known mortgage program operated by the U.S. Department of Agriculture – that’s right, the same agency that inspects and approves the meat in grocery stores – is enabling many people to afford a home even if they can’t come up with a traditional down payment because of the economic downturn.
The program is designed to help people buy homes in rural areas – but “rural” is loosely defined and in some cases can mean a town of up to 25,000 people. As a result, many people can qualify if they are living in a small town or are willing to move to a smaller suburb that is 10 or 15 miles outside a major city.
The benefit: If you qualify, you can get a no-money-down mortgage. The USDA charges a 2% insurance fee to cover bad loans, but you can finance that as well – which means you can get a loan equal to 102% of your property’s value.
In addition, you don’t have to pay PMI, or private mortgage insurance, which is charged by most lenders to borrowers who can’t come up with a 20% down payment.
While the USDA makes some direct loans to low-income borrowers, it also guarantees loans made by private lenders to borrowers with moderate incomes. The interest rate on these guaranteed loans is set by the lender, not the USDA, so it may vary from lender to lender.
There are a number of restrictions on USDA-guaranteed loans:
- You have to substantiate your income.
- Your household income can’t exceed 115% of the median area income.
- You must have a “reasonable” credit history.
- You can only get a fixed-rate loan, not a variable loan.
In addition, the scope of the program is limited each year to the amount of money appropriated by Congress. As interest in USDA loans increases, the pool of money might start to dry up.
Interestingly, USDA mortgage loans have a lower rate of foreclosure than other loans – which is perhaps surprising, given that they can be no-money-down. But the USDA says it has few problems because it requires fixed rates and income verification, and because it operates in small towns where homes cost less and property values are less likely to balloon and crash. The average USDA loan amount is about $120,000.