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VA and USDA Loans: 0% Down Loans For Those Who Qualify

FHA loans may be the most common government-backed loan when it comes to buying a home, but there are two others that may provide an even better fit for the right candidates: VA Loans, and USDA Loans.

VA Loans

The VA loan was created in 1944 to guarantee loans issued to veterans and their families. Many military families find it difficult to qualify for conventional loans due to tough credit standards and down payment requirements, but with a VA loan, home ownership is within their reach.

Here are some points about VA loans that may be of interest to you:

  • There is no down payment required, however, there is a funding fee of 2.15% of the purchase price (3.3% if you’ve used a VA loan before)
  • There is no private mortgage insurance (PMI) required
  • Interest rates can be better than conventional loans by up to 1 percent
  • Qualifying for a loan is easier
  • Your Basic Allowance for Housing (BAH) is counted as income
  • Closing costs can be lower

With such wonderful benefits, why isn’t everyone going for this loan? Not everyone qualifies. Let’s take a look at qualifications for the loan.

The VA Loan is designed for those who have served our country in the military.

To be considered, you must:

  • Have served 90 consecutive days of active service during wartime, OR
  • Have served 181 days of active service during peacetime, OR
  • Have more than 6 years of service in the National Guard or Reserves, OR
  • Be the spouse of a service member who has died either in the line of duty or as a result of a service-related disability

If you meet the military qualifications, you will also have some income qualifications to meet. Unlike most loans, the VA Loan doesn’t set a specific income level requirement. However, you will need to have stable, reliable income that can cover your monthly expenses including the new mortgage payment.

Instead of front-end and back-end debt to income ratios, VA loan requirements look at residual income. Residual income, also known as discretionary income, is the money that is left over after you have made all your monthly payments, including your mortgage and escrows, student loans, car loans, credit card bills, child support, spousal support, day care, and other obligations. Expenses such as food, entertainment, and utilities are not considered when determining your residual income.

USDA Loans

The USDA’s Rural Housing Service offers a program known as the Section 502 Direct Loan Program. This program provides either a direct loan or a loan guarantee to low and moderate-income borrowers wishing to buy in a rural area.

To qualify for this USDA loan, you must:

  • Have an adjusted income that is at or below the low-income limit for the area in which you are buying a home
  • Currently be without good housing
  • Be unable to get a loan from other sources
  • Plan on living in the home as your primary residence
  • Be a citizen of the United States

In addition to the borrower’s qualifications, the home itself must also qualify. It must:

  • Be less than 1,800 square feet
  • Have a market value that is less than the area’s loan limit
  • Have no swimming pool
  • Not be an income generating property
  • Be in an eligible area, which is a rural area with a population of fewer than 35,000 people

These loans have fixed interest rates based on current market rates. However, since the rates are modified by payment assistance, your rate could be as low as 1%. Additionally, most loans are for 33 years instead of the traditional 30. For those with very low income, this can be stretched to 38 years. Finally, you will not need a down payment unless your assets are higher than the predetermined limits. If they are, you may be required to use some of your assets as a down payment.

Unlike other government-backed programs, the USDA program will require that you repay all or a portion of the payment subsidy when you no longer live in the home.

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