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Can’t Afford a Down Payment? There’s Another Way to Get a Mortgage

Scott Bilker Scott Bilker is the founder of DebtSmart.com and author of the best-selling books, Talk Your Way Out of Credit Card DebtCredit Card and Debt Management, and How to be more Credit Card and Debt Smart. Receive the 5-Year Loan Spreadsheet when you subscribe to his email newsletter.

We all know that buying a house isn’t cheap. It requires hundreds of thousands of dollars with a down payment of a ton of money. For some families, it’s not the house that they can’t afford; it’s the down payment.

Fronting thousands up to tens of thousands of dollars is not always easy. Not many people have that much money kicking around that they’re ready to part with. How can you purchase a home if you can’t give the required down payment for a mortgage?

There are other options besides a conventional bank mortgage that is more affordable, especially for first-time homebuyers. One of those is a USDA loan.

What is a USDA Loan?

A USDA loan is a mortgage backed by the United States Department of Agriculture, in part with the Rural Development Guaranteed Housing Loan program. Don’t let who it’s by trick you though. You don’t need to live on a farm to qualify for this mortgage.

The loan started as a way to promote the appeal of rural and suburban living, and to make it more affordable. It’s a 100 percent financing loan that requires no down payment from you.

What Are the Benefits?

There are many benefits to the USDA loan besides the no down payment. However, not having to front any money is what draws people towards this loan.

The interest rates for a USDA loan are fairly competitive compared to other mortgages. You’ll find that these loans offer some of, if not the lowest interest rates on the market. This is another benefit that makes getting a mortgage more affordable.

The credit guidelines are quite flexible compared to a conventional bank loan. You do not need to meet a minimum credit score (although the higher your score, the better). Because the credit score for a USDA loan can be low, it opens up more opportunities to those who have had financial issues in the past.

There is a location requirement for this loan. However, you’ll find that what the country defines as rural and suburban actually covers quite a bit of land. You could be only a few miles outside of a major city and qualify as a suburban location for the loan.

What Are the Drawbacks?

As with any loan, there are drawbacks. Although there is a lot of appeal to the USDA loan, there are points that some may consider as a downside. The first is that the loan is location specific. For some, that’s a benefit because they want to be in a rural or suburban location. For others that prefer to live in the city though, you would not be eligible for this loan.

Another drawback is the type of home you live in. The USDA loan is for single-family homes. Multifamily properties that are common for rentals would not be eligible for the USDA loan.

You can only use the loan for purchasing a home. You cannot do a cash-out refinance with the USDA program. That means you wouldn’t be able to take out a second loan to help pay for school or repairs to the property.

The USDA loan could be what you need to make a mortgage affordable for you. Consider your options and speak to your trusted lender about the USDA loan.

This entry was posted in Mortgages. Bookmark the permalink. Read more articles by Scott Bilker. (Also see articles by all authors and articles in all categories.)

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