Rising home prices have many potential buyers wondering if they’ll be able to save enough for a down payment in today’s market.

If the down payment hurdle is holding you back from homeownership, one option may be the Rural Development Guaranteed Loan Program offered by the U.S. Department of Agriculture (USDA). 

What is a rural development loan? 
According to the USDA website, the Rural Development loan program “helps lenders work with low- and moderate-income households living in rural areas to make homeownership a reality.” The USDA says, “Providing affordable homeownership opportunities promotes prosperity, which in turn creates thriving communities and improves the quality of life in rural areas.” 

With this loan, qualified buyers may “purchase, build, rehabilitate, improve, or relocate a dwelling in an eligible rural area with 100% financing.” This makes the Rural Development program one of the only loans, other than the VA loan, that doesn’t require cash up front for the down payment. 

“It’s probably the most underutilized loan type available to homebuyers today,” said Lara Hitchcock, mortgage originator with PFCU. “I think people get hung up on the term ‘rural,’ and believe their options are limited. But there are many qualifying areas in our market, including Grand Ledge, DeWitt, Williamston, Bath, Mason, and more.” 

What are the specifics? 

One benefit that sets the Rural Development program apart from others is that you can borrow 100% of the home’s appraised value. So, if you have a $100,000 purchase price on a property that appraises for $102,000, you can use that extra $2,000 to finance in closing costs, prepaid expenses, property repairs, etc.

This Rural Development loan is not limited to first-time homebuyers, but one requirement that can get tricky is income. In order to qualify, the income of all adult household members cannot exceed 115% of the area median income limits. If a husband and wife occupy a home, but only the husband will be on the loan, the wife’s income must still be counted. If grandparents will be living in the home, their social security will likely be included in the total income even if they aren’t listed on the mortgage.

What do these income limits look like? For a household of up to four people, including children, the limit in the Lansing market is $92,200. For a five-to-eight-person household, it’s $120,700.  

There are no credit score qualifications from the USDA, but most lenders require a at least a 640. Although Hitchcock says some, including PFCU, may accept scores as low as 620. 

“Borrowers must also have at least two sources of credit with at least 12 months of positive payment history, whether that’s an auto loan, credit card, etc.,” she said. “However, the USDA does accept some non-traditional sources like rental payments, utility payments, medical insurance payments, etc.” 

The home purchased must be utilized as a primary residence (not an investment property or second home), and it must be a single-family home (no duplexes). But there are options regarding the type of property — existing homes, new construction, condos, modular homes, and some manufactured homes apply. 

As far as loan limits, buyers in most qualifying areas can purchase a home up to $285,000. 

Are there any drawbacks? 

Some potential buyers may be concerned that using a Rural Development loan will make them less competitive. In this fast-paced seller’s market, conventional loan offers are typically the most desired (second only to an all-cash offer). However, Hitchcock says PFCU has been writing many Rural Development loans, so she encourages buyers to at least explore the option. 

“There are several benefits with this program — no down payment, low interest rates, and a Rural Development fee that takes the place of, and is usually less than, private mortgage insurance,” she said. “I think the downsides are probably the income limits and property restrictions. But for those who meet the requirements, it’s a great loan option that has helped many buyers achieve the goal of homeownership.” 

As with any loan program, it’s important to discuss details with your lender. There is no one-size-fits-all approach to mortgages, so while a Rural Development loan has many advantages, there may be a different program that better suits your needs. You can find a list of local, reputable lenders by visiting the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com.