Zero-down loans exist in rural areas (© Dana Hoff/Beateworks/Corbis)

© Dana Hoff/Beateworks/Corbis

The zero-down mortgage is still alive through the Agriculture Department's rural-development housing program.

People buy houses without down payments or mortgage insurance with USDA loans. The catch? The property must be in a designated rural area. The surprise? Some eligible properties are in places that most people would not consider rural. (Bing: What is mortgage insurance?)

"The terms of eligibility for a USDA loan are twofold, because not only does the borrower need to qualify, but so does the property," says Tommy Xintaris, a senior mortgage banker with Envoy Mortgage in Houston, which lends throughout Texas. "It's a small box that borrowers have to fit into, but it's a great program if they do."

Do you qualify?
First, to be eligible, the property must be in a designated rural area. The USDA website lists counties designated as rural. But some properties are eligible for USDA loans in counties that are not designated rural, Xintaris says. There are eligible homes on the outskirts of Austin, Texas, for example.

"The best way to find out about property eligibility is to enter an exact address (on the USDA site)," Xintaris says.

After the home's location is deemed eligible, the borrower must meet income and credit standards.

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"Borrowers must have a low to moderate income and yet be able to afford the payments on the property," says Paul Defngin, a mortgage planner with Apex Home Loans in Rockville, Md. "USDA has established income limits. Borrowers can enter their ZIP code, income and number of members of the household and will know immediately if they qualify for the program."

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To check on income limitations by county, go to the USDA's income-eligibility site.

Defngin says borrowers must demonstrate they can afford the mortgage payments by meeting the USDA debt-to-income ratios of 29% for the housing payment and 41% for the overall debt to gross monthly income.

Additional rules
The borrower pays an upfront guarantee fee of 3.5% of the loan amount, which most people opt to roll into the loan. In some first-time-buyer programs, borrowers can have their closing costs paid.

USDA loans are not available to investors. The home must be the borrowers' primary residence. Most construction types are eligible, including manufactured and modular homes, as long as they meet condition standards.

Nick Serrano, sales manager for Greater Nevada Mortgage Services in Carson City, Nev., says the program is for people who do not own homes.

"The program isn't limited to first-time buyers," he says, "but if someone owns a house and wants to buy another with this loan, (that person has) to sell it first and pay off the mortgage in full."

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Unlike most low- or no-down-payment loans, Defngin says, USDA loans do not require mortgage insurance.

Lenders qualify borrowers based on their credit score and their debt-to-income ratios. USDA does not set a minimum credit score, and lender minimums vary. Xintaris says Envoy Mortgage requires a minimum score of 600, while Serrano says Greater Nevada Mortgage Services requires 620. Defngin says Apex Home Loans requires a 640 credit score.

Program perks
USDA home loans are not subprime. Serrano says.

What's your home worth?

"A lot of people are frightened by the idea of zero percent financing, but this loan is very different from subprime loans," he says. "First, the loans are guaranteed by the government. Also, the loans are stable, 30-year fixed-rate products, and borrowers must fully document everything and qualify for the loan."

Serrano also says: "USDA loans used to be the best-kept secret, but now this loan program has momentum. It's so popular that they ran out of their budget earlier in 2010, although Congress has restored funding now.

"The only negative to this loan at all is the fact that not every property and not every individual qualifies. But if someone does qualify, there is no reason not to take advantage of this program."

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