USDA loans are government-backed mortgages that allow borrowers to purchase homes in eligible rural and suburban areas without putting any money down. These loans are a popular choice for first-time homebuyers who cannot afford a large down payment or have limited savings.
In this article, we will delve into USDA home loan down payment requirements and how they differ from other types of mortgages.
USDA Down Payment Requirements
To take advantage of the no down payment benefit, USDA borrowers must meet other eligibility requirements. These include:
- Being a U.S. citizen, U.S. permanent resident or a foreign national who can’t qualify for a conventional mortgage
- Buying a home in a qualifying USDA area
- Meeting USDA income limits
- Living in the home as your primary residence
Should you make a down payment on a USDA loan?
Yes, you can make a down payment on a USDA loan, even though it’s not required. Putting money down lowers your monthly mortgage payments and reduces the amount you pay interest on. In addition to mortgage interest, USDA loans come with a 1% upfront guarantee fee and a 0.35% annual fee, which help fund the program. A down payment can reduce both of these costs, saving you money over time. Here’s an example of how it works:
| 30-Year USDA Loan Without Down Payment | 30-Year USDA Loan with Down Payment | |
|---|---|---|
| Loan Amount | $250,000 | $240,000 |
| Down Payment | $0 | $10,000 |
| Upfront Guarantee Fee (1%) | $250,000 x 0.01% = $2,500 | $240,000 x 0.01% = $2,400 |
| Annual USDA Fee (0.35%) | $875 x 30 = $26,250 | $840 x 30 = $25,200 |
| Interest (5%) | 12,000 x 30 = $235,471 | 12,000 x 30 = $226,052 |
| Total Mortgage Cost | $514,221 | $503,652 |
Pros and Cons of Making a Down Payment
| Pros | Cons |
|---|---|
| Start with more equity in home | Less cash for expenses |
| May expedite the loan process | More susceptible to unstable property values |
| Smaller monthly payments | Larger monthly payments |
USDA Loan Down Payment vs. Other Types
While a down payment can help lower monthly mortgage payments and reduce the amount of interest paid over the life of the loan, it can also be a significant obstacle for those who cannot afford to save thousands of dollars for a down payment.
USDA loans can be a viable option for those with limited savings, but let’s see how they compare to other home loan types:
| Loan Type | Down Payment Requirement |
|---|---|
| USDA | No |
| VA | No |
| FHA | 3.5% |
| Conventional | At least 3% (typically 5% or more) |
