The No-Down-Payment Loan Everyone Wants, But Few Get

One mortgage loan program that’s become popular in recent years is the U.S. Department of Agriculture loan. The program allows you to buy a home with no money down and low monthly mortgage insurance. Here’s what you need to know if you’re interested in this type of financing.

What the Program Entails

The USDA offers this mortgage loan program to help less-industrialized areas attract more homeowners. The USDA determines certain areas in each county nationwide that allow borrowers to put no money down and purchase a home with a 30-year fixed-rate mortgage. As an example, Sonoma County, California has a few USDA-eligible areas. But loan applicants must not earn more than $97,000 per year.

Location Is Everything

The USDA will only grant loans to borrowers aiming to buy a single-family house for less than $375,000. So if you want to buy a house in Sonoma County, where median home prices exceed $375,000, you may find a USDA loan does not suit your needs.

Let’s rewind the clock to 2012 using our Sonoma County example. Back then, its median home price was $325,000, and as such, USDA loans were popular. That is, the USDA’s view on affordability was consistent with the local housing market. But in several markets nationwide, the average median home price per area has soared, exceeding $375,000 in many pockets. Simply put, in order to qualify for a house in the $425,000 to $450,000 range, you need to earn $97,000 a year or more, which would render you ineligible for the USDA loan.

This income-to-payment depiction is also based on cumulative debt. If you carry a car loan, student loan or credit card debt, for instance, you would need even more income, which would push you out of the USDA box. The USDA loan has a strong debt-to-income ratio requirement at 31%.

What’s Practical for Your Market

It’s important to speak with a lender about how much house you can afford. You should also speak with a real estate agent to learn the average price for your area and what kind of homes fit your budget. To purchase a house in Sonoma County, California, for example, you’ll need at least $20,000 to get your foot in the door. And it will probably mean having to look at different types of mortgages, such as Federal Housing Administration loans, which would require a 3.5% down payment but offer a more flexible debt-to-income ratio requirement. Alternatively, a 5% down conventional loan may be more appropriate since, like an FHA loan, there are no limitations on location or household income.

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Until the USDA adjusts its requirements, USDA loans generally will remain out of reach for prospective homebuyers. Of course, the biggest obstacle, aside from figuring out which mortgage loan program is best for you, is getting the house in contract. Many sellers consider a USDA loan offer from a client with 100% financing less attractive than a borrower with down payment funds. Knowing this fact alone may help you get an offer accepted than going with a loan that’s inconsistent with the local housing market.

Remember, you won’t get very far with any mortgage application if your credit’s not in good shape. To see where you stand — and how debt may be affecting your creditworthiness — you can view your free credit score, updated every 14 days, on Credit.com.