If you're looking to buy a home in a rural or suburban area with no down payment and minimal investment, you might consider the USDA Rural Development Loan. It can be a good option if you are buying your first home and do not want to live in a large, urban area.
The loans are backed by the U.S. Department of Agriculture and were created to help people living in low- to moderate-income households put down roots in certain rural locations and develop new areas of the country. It makes sense, then, that the main requirement is that the property must fall within certain geographical areas, outside the city limits of major metropolitan centers. As long as you qualify, you can build, rehabilitate, improve or relocate a dwelling as your primary residence in eligible rural areas. And you can borrow 100 percent of the appraised value. That means you do not have to come up with funds for the down payment, which can be a challenge for many homebuyers.
If you think this means you'll be living down a long winding country road with the closest neighbor a mile away, you're mistaken. It's certainly an option if that appeals to you, but many areas that fall under the Rural Development umbrella are actually more suburban than you'd expect. As an example, rural development in northern Indiana covers most areas except Gary, South Bend and Fort Wayne. Or in Ohio you couldn't use this loan to buy a home in Columbus, Cleveland or Cincinnati. However many other villages, towns and areas are eligible.
While the loans are backed by the U.S. Department of Agriculture, they don't actually provide you with the home loan. You apply and receive your loan from approved lenders (such as Amerifirst Home Mortgage). The main benefit to you is that you can get low mortgage interest rates, even without a down payment. Be aware, however, that if you put little or no money down you will have to pay a mortgage insurance premium. The loan term is a 30-year fixed-rate mortgage.
Pros of the USDA Rural Development Loan
- No down payment option (100% financing)**
- No cash reserves required
- Flexible credit and qualifying guidelines
- Seller can pay closing costs
- Low fixed interest rate
- No pre-payment penalty
- Ability to finance repairs and closing costs into loan
- Good for purchase or refinance
- You can build a home with the loan
Cons to the USDA Rural Development Loan
- Geographic restrictions
- Mortgage insurance included (may be financed into loan)
- Income limits
- Single family, owner occupied only - no duplex homes
You may want to compare the USDA RD loan to another option, the FHA loan.
If you're wondering if you and your proposed property qualify for a USDA Rural Development loan, contact a branch close to you. One of our friendly loan officers will be happy to give you more details about the loan. We're always happy to help!
**Zero down payment and other figures shown are for informational purposes only and are not intended as an advertisement or commitment to lend. Not all borrowers will qualify; contact us for a specific quote and more information on fees and terms.