First Time Homebuyers: Is a Zero-Down Mortgage for You?

by on March 8, 2013

For prospective homeowners, mortgage costs and down payments can be a pretty steep requirement to meet. Gone are the days before the housing bubble burst, when you could pay drastically low down payments, or in some cases none at all. Today, you might expect to pay between 10 and 20 percent for a down payment, depending on the value of the home you wish to buy.

Luckily, there are still some ways to lower that down payment percentage through government programs. One way is to procure your loan through the Federal Housing Administration (FHA). With an FHA approved loan the down payment can be as low as 3.5%.

Zero-down may still be an option

If you are looking to pay nothing up front for your home, there are two primary federal options to consider: a VA Loan, or a USDA Rural Development Loan. If you happen to be a veteran, reservist, or active duty service member you may be eligible for a VA loan, although eligibility can vary so it is best to consult their website.

An increasingly popular choice among first-time homebuyers is the United States Department of Agriculture’s Rural Development loan. This loan program is aimed at providing homeownership opportunities for low- and moderate-income individuals. The loans can also provide funding for vital home improvements.

Although the program was originally created to help farmers, it has been broadened in scope over the years to apply to entire rural communities. The loan is backed by the U.S. government, and can be applied for as much as 100% of the appraised value of the property, which means no down payment. These loans also don’t require mortgage insurance, which can end up being a pricey aspect of a private loan.

As good as this deal may sound there are restrictions to it, and the eligibility process is two-fold. In order to be approved for a USDA Rural Development Loan both the buyer and the property must qualify.

Property eligibility

In order for a property to be eligible it must be in a rural area. This means that the population of the area you want to live in must be less than 20,000 people. Initially, this requirement may seem drastically limiting to your career prospects. However, there are many areas deemed eligible by the USDA within commuting distance from major cities.

For example, if you work in San Francisco, California, you may think this program can’t possibly offer anything promising nearby. But just an hour north of the city, in the town of Windsor, your property would be eligible for a zero-down mortgage. If homeownership is your dream, a bit of an extra commute may an acceptable price to pay.

There are numerous eligible regions within an acceptable commuting distance from a major city. The USDA provides a map that highlights such areas. If you already have a property in mind enter the address to see if it’s eligible.

Buyer eligibility

The second requirement to accessing a USDA Rural Development Loan is income. Since this is so heavily reliant on your own personal situation, it is advisable to use the income eligibility calculator on their website to learn more.

For first-time homebuyers, a USDA Rural Development Loan is a great option to consider if you do have the ability to make monthly mortgage payments, but a home is still out of your reach due to the required down payment. Furthermore, it doesn’t mean you must live in the middle of nowhere. Americans of all career types and living preferences may well find a community in which to call home, with the help of a USDA loan.

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John Gower is an analyst for NerdWallet, a personal finance website dedicated to helping homeowners find the best cd rates and savings accounts to help save for their first home purchase.

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