When you hear 100% financing, no money down as an option for a loan most people say, “no way, not possible, what’s the catch?” Many people, including lenders do not even know this loan program exists.
What is the name of this loan and how does it work? It goes by a few different names: USDA Rural Development Home Loan, USDA Home Loans, RD Government loans. No matter what you call them, there is no catch as far as the 100% financing. The main qualifying requirement for the loan is the property needs to be in a designated rural eligible area that USDA has established.
The loan itself is great, especially for first time home buyers who may not have a lot of money set aside for down payment. The rates are always great and the monthly guarantee fee is significantly less than the mortgage insurance on other programs.
The basic breakdown of how the loan works and why the option of offering the 100% financing is possible is the loan has an upfront funding fee of 2% that is automatically built into the loan amount itself; this money is not required out of pocket. The funds from this 2% funding fee are sent directly to USDA dpt, it works as their upfront insurance and allows the borrower to not have the burden of out of pocket down payment expenses.
USDA loans also allow for the seller to cover all closing costs, up to 6%, so once again no money required out of pocket. This now leaves the only out of pocket expense for the borrower the cost of the appraisal and any earnest money needed to hold the property through the underwriting (escrow) process.
For those who are able to qualify for this loan it definitely is the most cost effective program being offered today.