Single-family home loans are on the rise due to low mortgage rates, rising rental costs, and a recent building boom. Affordable mortgages are more obtainable today than they’ve been in years. Buyers are able to purchase their dream homes, even brand new constructions, for $0 down. Many low-cost mortgages are on the market, but the lowest of all is the USDA RD loan. This loan is the only loan requiring no downpayment, other than the veterans-exclusive VA loan. The USDA RD program is available through approved lenders for buyers meeting lenient standards.
In September 2016, home sales were up 8% from August. More housing permits, which precede construction by 60 days, are being issued and builders are optimistically predicting a prosperous 2017. This year, new construction has already increased by 5%. This influx of new homes on the market necessitates buyers, many being first-time buyers who want the opportunity to make their own design decisions at low cost.
USDA loans have no loan limit and new constructions are eligible, so a buyer can purchase a new home with no money down, excluding any arrangements they may have directly with the builder. The home must be in an approved rural development area, which many new homes are as neighborhoods are being developed on the outskirts of major cities and on rural land.
Existing homes and foreclosures are also eligible for the USDA loan. These must pass home inspections and meet USDA’s standards, including residing in an approved area. Buyers must plan to use the home as their primary residence and not as an investment property. There are many existing RD-eligible homes as the majority of U.S. land is considered rural.
Downpayments are just one of the costs of buying a home. Every loan, regardless of loan program, has seller and buyer closing costs that are due at the closing table. Typically closing costs add up to around 3% of the purchase price of the home, but they can vary depending on the loan particulars. Often the purchase price of a home is increased to allow the seller to cover the closing costs, but many programs have limits on how much can be covered. The USDA program allows up to 6% of the purchase price to be financed into the loan balance, which is much more than average closing costs. This means the buyer is not expected to come up with any cash out-of-pocket.
All mortgages with less than a 20% downpayment are also subject to mandatory mortgage insurance. This is insurance for the lender in case the buyer stops making mortgage payments. RD has a guarantee fee instead of mortgage insurance, and it is much lower than competitors: 1% upfront and .35% annually. Like closing costs, the upfront guarantee fee may be financed into the loan as well, along with the .35% annual fee. This makes for lower monthly payments than competing loan programs, despite no downpayments.