Mortgage Daily

Published On: December 15, 2022

Buying a Home With No Down Payment

The needed down payment is one of the most significant obstacles to homeownership.

This obstacle only exists with USDA loans.

You need to find a property in a suitable location, which comprises around 97% of the United States’ geographical mass.

Have no funds to purchase a home? This mortgage option may be the key to homeownership.

How a USDA Loan Functions

USDA house loans are guaranteed loans backed by the Rural Development Loan Program of the United States Department of Agriculture.

This financing option is aimed at helping rural households with low to moderate incomes become homeowners. There are no down payment requirements for USDA loans.

This is one of just two main products that do not need a deposit. The second option is the VA loan, which requires qualifying military service.

Contrary to most conventional house loans, the USDA loan is neither a Fannie Mae nor Freddie Mac-backed traditional mortgage.

Because a government entity backs the USDA home loan program, lenders can frequently provide mortgage rates below the market average.

USDA Mortgage Loan Eligibility

To qualify for a USDA loan, you must fulfill both the program’s income limitations and acquire a property in a rural region that qualifies.

Remember that income restrictions will vary depending on your area and household size.

In 2021, for instance, the USDA’s family income restrictions in Chattooga County, Georgia, and Aurora, Colorado, varied significantly.

In addition, many first-time homebuyers are shocked by how many properties are situated in rural regions that qualify for the program. The USDA classifies approximately 97% of the United States landmass as rural.

Explore here the USDA income restrictions for your region.

Other Fundamental USDA Eligibility Requirements

  • Minimum credit score: No minimum is required; most lenders want 640.
  • Credit history: The credit report should not indicate recent late payments, foreclosures, or bankruptcies.
  • Income requirements: Regional and household size-based income limitations apply. Typically, your salary must be below 115% of the typical income in your area (AMI)
  • Requirements for employment include a history of stable income and work. Self-employed borrowers also qualify.
  • Requirements for the property: It must be a single-family house in an eligible rural location that will serve as your principal residence.
  • The USDA offers only 30-year fixed-rate mortgages.

USDA Down Payment Requirements

In addition to lower mortgage rates than the market average, the USDA loan does not demand a down payment. In addition, USDA mortgage insurance is more affordable than many other low-deposit lending options.

However, if you bring a down payment to closing, your monthly mortgage payments will be lower, which can result in significant savings over the life of the loan.

Calculate your potential savings with and without a down payment with a USDA loan calculator.

Regardless of the option, you select, you will still be responsible for closing charges.

However, homebuyers who wish to purchase with minimal out-of-pocket payments can lower USDA loan closing costs using a few typical tactics.

What Are the USDA’s Closing Costs?

USDA closing fees are comparable to those of other major lending programs, averaging between 2% and 5% of the loan amount. On a $300,000 USDA mortgage loan, closing expenses range between $6,000 and $10,000. They may vary significantly based on the lender and area.

USDA loans do not need a down payment; therefore, your closing costs will be significantly lower.

USDA mortgages demand no down payment. Compare this to FHA loans, which demand a 3.5% down payment, and conventional loans, which require between 3-5% down.

Even though no down payment is necessary, you will still be responsible for closing expenses, which might run into the thousands.

There are two kinds of closing costs:

  • Fees for acquiring the loan and transferring the title
  • Expenses related to the real estate

Typically, prices associated with acquiring A USDA loan and the property differ depending on the lender or business.; however, some fees related to the property are consistent regardless of where the loan is obtained.

What Are the USDA Loan Closing Costs?

You must pay various closing costs when purchasing a new home with a USDA loan.

To qualify for a mortgage loan, all borrowers, including first-time homebuyers, must pay a portion of these closing expenses.

However, your approved USDA lender will charge additional costs associated with the USDA rural development loan program.

Additionally, USDA loan closing costs may vary per lender.

Normal Closing Expenses

Whether you are refinancing your current USDA loan or receiving a purchase loan, you must pay specific fees when submitting a loan application.

The following fees should be included in your closing expenses.

Fees for Loan Origination

Generally, 0-1 percent of the loan amount. The processing and underwriting of your loan application will incur an origination fee from your lender.

“Some lenders charge a flat fee, while others charge a percentage,” explains Jon Meyer, licensed MLO and loan specialist at The Mortgage Reports. You can inquire with your lender about any wiggle room.

Fees for Underwriting

Sometimes referred to as loan application costs or processing fees, your Loan Estimate will detail numerous mortgage lender-specific expenses.

The good news is that underwriting fees and other closing charges are sometimes negotiable. Therefore, consult your loan officer regarding rebates and reductions.

Appraisal Charge

In most cases, a house appraisal is required as part of the loan application procedure; however, there are exceptions.

A professional appraiser will determine the property’s worth based on an examination, local real estate market circumstances, and similar selling prices in the vicinity of your new home.

The appraisal fee covers the cost of validating the property’s fair market value to ensure that it matches the home’s purchase price.

Fee for Credit Report

This charge covers the cost of obtaining your credit report from the three main credit agencies to calculate your credit score.

Discount Points

Discount points, often known as mortgage points, are optional closing expenses. When you purchase or pay discount points at closing, you are paying money up in advance to reduce the interest rate on your loan.

Some borrowers utilize discount points to cut their monthly payments, which can result in significant savings over the life of the loan.

However, your savings will depend on how long you want to reside in the property before selling or refinancing.

Title Cost

Title insurance protects your lender against claims or liens on the title of your new house.

As a homebuyer, you may be responsible for this amount as part of your closing expenses, but occasionally the seller may pay for title insurance on the buyer’s behalf.

Escrow Expenses

This charge is paid to the escrow or title business to establish an escrow account for your earnest money and any other cash that may transit between you and the seller.

Recording Costs

The recording fee supports the cost of updating public recorders with new ownership information by your local government agency, often the County Recorder’s Office.

Expenses Particular to USDA House Loans

Unique to the USDA’s rural development loan is two extra fees: the guarantee charge and the yearly fee.

Guarantee Fee

USDA home loans include a cost known as a guarantee fee, often known as a financing fee.

Typically, the guarantee charge equals 1% of the loan amount. This can be paid in advance, but most borrowers choose to roll it into the loan balance to avoid paying the charge at closing.

Annual Cost

Although not a closing cost, USDA loans have an annual mortgage insurance premium of approximately 0.35 percent of the loan amount.

The yearly mortgage insurance premium will be divided into 12 installments and added to your monthly mortgage payment. Therefore, this does not affect your closing expenses.

Expenses Unique to the Property

Certain costs are obligatory for all homeowners. The lender will demand you to prepay a specific number of months of these expenditures when you obtain a mortgage.

This is done to ensure that your new house is safe from being confiscated by the government in the event of unpaid taxes or damage in the absence of insurance.

  • Typically, property taxes amount to around 1% of the annual property value.
  • Depending on the home’s market worth, homeowner’s insurance costs between $500 and $1,000 each year.

Typically, the lender may need several months’ worth of property taxes and homeowners insurance to be paid in advance at closing. Your lender deposits these funds into an “impound account” and pays the insurance provider and tax authority when due.

Although the amount of taxes and insurance paid in advance varies by state, common prepayment sums may include the following:

  • 4 to 8 months of property tax payments
  • 12 to 14 months’ premiums for homeowner’s insurance

For example, your home’s worth is $200,000, and your annual property taxes are 1%. In addition, your yearly homeowner’s insurance rate is $600. Approximately, the lender would collect:

  • $1,000 in taxes already paid (6 months)
  • $700 in insurance premiums paid in advance (14 months)

After collecting the fees, the lender sends money to the county tax office and your insurance provider. They manage these payments to verify that the things are fully paid for.

Such expenses as a home inspection and house warranty are recommended, but they are neither required nor collected by the lender.

Utilize These Ways to Cover Closing Expenses

The good news is that the borrower does not pay for USDA mortgage closing expenses.

Take Out a Larger Loan

If the assessed value exceeds the purchase price, a little-known USDA rule allows you to take out a larger loan to cover closing expenses. For example:

  • $200,000 selling price
  • $205,000 assessed value
  • $5,000 additional loan amount available

Other methods of covering closing fees are as follows:

Seller Credit

In some real estate markets, the seller may “pitch in” additional funds to cover closing fees.

Typically, seller credits are given when a motivated seller receives a few bids for their house.

Meyer adds, “If you anticipate needing more cash for closing fees, you may offer $10,000 more with a $10,000 seller credit.” This is a standard method that many of my clients employ.

Lender Credit

The lender might increase your interest rate slightly and credit you with the additional profit. For instance:

This cash can be utilized for all lender, title, escrow, property tax, and insurance costs.

Gift Funds

Gift funds permit you to obtain financial assistance from a relative, employer, or other qualified sources to cover all or a portion of your closing costs.

Check Your Eligibility for USDA Benefits.

USDA financing eliminates conventional homeownership constraints. USDA purchasers are exempt from paying a significant portion of the down payment and closing expenses required by most homebuyers.

Check your eligibility for this mortgage with no down payment, and go on the path to homeownership.

 

 

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