Many homebuyers know that the VA offers 100% mortgage financing for eligible military vets. But what about regular citizens in Minnesota, do they have any options for 100% financing? Yes, The United States Department of Agriculture (USDA) has mortgage programs designed to assist buyers in living in rural areas.
One of the best programs is the USDA 502 Guaranteed Loan which helps low to moderate-income individuals purchase homes with no money down in approved rural locations.
For a home to be approved it must be located in a specific approved area. These locations ultimately deemed rural are designated by information drawn from the Census Bureau. In general, about 3 percent of the land area in the United States is populated and makes up more than 80 percent of the population. Conversely, the other 97 percent of the land area is considered rural and less than 20 percent of the population lives there.
The last Census was taken years ago, and a lot can happen during that time in between. An area that was declared rural in 2010 may not be so rural today. As urban and suburban areas expand, eventually an official rural area looks nothing like a rural area. New developments, schools, and businesses crop up in places where the USDA loan can be used because the data is so old.
You won’t be able to obtain a USDA loan in more populated cities like Minneapolis-St. Paul, but outlying areas may certainly be eligible. Again, you can’t just look around and determine whether or not a USDA loan can be used. That designation comes directly from the U.S. Census Bureau and because the information is almost 10 years old, you might be surprised where the USDA mortgage is an option.
USDA home mortgages provide competitive, government-backed 30 year fixed rate terms but another attractive feature is the lack of a down payment. USDA loans do not require a down payment at all. The only other zero-down loan is the VA home loan program which is reserved for veterans and certain members of the military. USDA loans have no such restrictions, anyone can apply for a USDA loan. As long as the household income and location requirements are met, the USDA loan can be an option.
To find out if a home is located in a rural area, you should contact your loan officer and provide information regarding the location of the property such as an address or zip code. The loan officer will input that information, research the USDA map, and determine whether or not a USDA loan is an option. USDA Rural Housing is an excellent choice for those wanting to close with as little down as possible and still be offered competitive interest rates.
The map below is a snapshot of the USDA-eligible housing locations for MN. The darker shaded areas represent locations that are not approved.
Now let’s talk about household income limitations. Due to the fact that USDA loans are reserved for low-to-moderate income buyers, there are specific limits placed on the amount of household income used. Note this is all of the household income for all occupants 18 years and older, not just the income of those applying on the loan application. In most parts of the country, the maximum income limit for a 1-4 member household is $110,650 for 2023. For a 5-8 member household, the limit is increased to $146,050. In select “high-cost” counties, the income limits can be over $150,000 per year.
Income is verified in a traditional manner just like other loan programs. Borrowers will be asked to provide their most recent paycheck stubs covering a 30-day period along with the last two years of W2 forms. For self-employed borrowers, the last two years of income tax returns and a year-to-date profit and loss statement will be needed.
Even though there is no down payment required, all home loans have closing costs. The lender will want to see verification that you have enough funds in an account that belongs to you to cover these costs. Your loan officer can provide a list of estimated fees at your request.
*Tip: USDA does permit the home seller to pay the buyer’s closing costs. thus reducing out-of-pocket expenses to the buyer.
If you live in an area that is apparently rural or in a suburb, make sure you ask your loan officer about the possibility of financing the home with a USDA loan. Competitive rates and low closing fees make for a very attractive offering.
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