One of the biggest hurdles to buying a home is saving up for a down payment.
But if you’re buying in a qualifying rural or suburban area — aka 97% of the landmass of the U.S. — you may be able to skip the down payment altogether with a USDA loan.
The USDA loan down payment requirement is 0%, which means you can buy a home with no money down.
Sounds too good to be true? It’s not — as long as you qualify.
What's in this Article?
A 0% down payment — what’s the catch?
There is no “catch,” per se. The USDA loan program was created to help people purchase homes in rural and some suburban areas and encourage economic development in these communities. They’re also meant to help low- to moderate- income families accelerate their path to homeownership.
It’s no free lunch, but it’s a discounted one, for sure.
You can get a no down payment USDA loan as long as you meet the eligibility criteria:
- The borrower must be a U.S. citizen, U.S. permanent resident or a foreign national who can’t qualify for a conventional mortgage (this typically means the borrower cannot make a 20% down payment)
- Purchase a home in a qualifying USDA area
- Meet the USDA loan income limits
- Home needs to be the buyer’s primary residence. Some examples of USDA eligible properties include:
- Planned Unit Developments (PUD)
- 1-Unit single family residences
- Manufactured homes
- Approved condo units
If you can meet all of the criteria, a USDA loan with a 0% down payment may be on your horizon.
I meet some of the USDA loan criteria, but not all. Do I still have a chance of qualifying?
It depends. The non-negotiables to qualify for a USDA loan are the income and location requirements.
If your adjusted household income exceeds the income limit for your area, you won’t qualify for a USDA loan.
Since these types of loans are intended for those who may not be able to purchase a home otherwise, USDA loans have income limits.
First, the USDA won’t approve loans if your adjusted household income is more than 115% of the median in your area. That means your income, plus the income of anyone else living in your household. That includes your spouse and any dependents who also earn money. For instance, for a family of four living in Fayette County, Ohio, the household income cannot be more than $91,900.
Adjusted household income refers to your household income after certain deductions are taken. These include allowances for dependent children and childcare expenses. So although your gross household income may be above the limit in your area, you could still qualify after taking deductions.
You can check your income eligibility here. Or you can talk with a USDA-approved lender that can calculate your eligibility for you.
Lenders also look at the borrower’s income to determine whether you can afford the loan.
Second, you need to buy a home in a USDA-eligible area. Yes, that means this loan is only available in certain locations. The USDA’s property eligibility map will tell you whether the home you want is in a qualified area. Simply type in the address and it’ll tell you either yes or no.
If you meet these two requirements, you’re still in the game. Your lender will also pull your credit score and history and look at your employment history and debt-to-income ratio to determine whether you qualify and how much you can borrow.
Generally, lenders look for a credit score of 620 or higher and a debt-to-income ratio (DTI) based on your Automated Underwriting results. However, the USDA gives lenders flexibility in determining creditworthiness. You may qualify even with a lower credit score or higher DTI.
It’s safe to assume that higher credit scores and lower DTIs increase your chances of qualifying for a USDA loan.
If I qualify for a USDA loan, do I need any money out of pocket?
Yes. There are closing costs with any loan, and these usually add up to 3-5% of the loan amount.
But if you qualify for a USDA loan and don’t have the cash to cover closing costs, that doesn’t mean the dream of homeownership is over for you.
You have a few ways to handle closing costs on a USDA loan:
- Roll them into the loan (if the appraised value comes in higher than the sale price, which could be rare in a seller’s market)
- Ask relatives or friends to make a gift toward closing costs. (Don’t forget, if you intend to use gift funds on your purchase, reach out to your Loan Officer to ensure it’s documented properly and your donor is an acceptable donor within the USDA guidelines.)
- Apply for closing cost assistance through a state or local program. Your lender may be able to help you determine what you qualify for
While USDA loans require a 0% down payment, there are some upfront costs. The good news is that there are plenty of ways to get those taken care of. No need to give up on your dream home if you don’t have the cash right now.
USDA loan down payment FAQs
No. USDA loans don’t require a down payment, unlike low down payment mortgages like FHA and conventional loans. Lenders who offer USDA loans give you the option of 100% financing, meaning you can borrow up to the appraised price of the home. If you need help covering closing costs, you may be able to roll them into the loan or use gift funds for those expenses.
USDA Guaranteed Loans don’t have loan limits. That being said, the maximum amount you can borrow will differ depending on your finances.
Put simply, your loan amount will depend on factors like your income, current debt load, credit score, assets, and cash savings.
USDA loan closing costs are similar to other types of home loans — you’ll need to pay for title insurance, a home appraisal, credit report fee and title search, to name a few. Other unique fees include additional inspections such as a well water test and a septic inspection, where required.
All of these add up, typically to between 3%-5% of your home’s purchase price. So if the home costs $200,000, closing costs can set you back anywhere from $6,000 to $10,000.
Don’t worry if you can’t afford that upfront fee on your own. Lenders may be able to roll the costs into your loan, you can get cash gifts from friends and family, or you may be eligible for closing cost assistance programs in your area.
The real deal
A USDA loan may sound too good to be true, but it’s the real deal. As long as you can meet the eligibility requirements — you know, location and income — you should be good to go.
Your next step is to talk to a participating lender to see what you may qualify for, including that coveted USDA down payment requirement of a whopping 0%.
Debt-to-income (DTI) ratio is monthly debt/expenses divided by gross monthly income.
USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits. Fairway is not affiliated with any government agencies. These materials are not from USDA, RD, FHA, or HUD and were not approved by USDA, RD, FHA, or HUD or any other government agency.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.