More than four years after real estate values peaked, the historic plunge in home prices remains fresh in the minds of mortgage lenders. After taking painful losses on delinquent home loans, banks have imposed tougher standards—such as increased credit scores and higher down payment requirements—on applicants of all stripes. And as investors fled for the hills, the exotic mortgage products that helped fuel the real estate boom have largely disappeared from the private market. But that doesn't mean all buyers need a big pile of cash to snag a home loan. In fact, loan guarantees from Uncle Sam are enabling hundreds of thousands of borrowers to obtain mortgages without putting any money down. To help consumers determine whether or not they might be eligible for such financing, here's a rundown on how to get a government-backed, zero-down-payment mortgage:
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USDA Rural Development: Although it was originally designed to assist farmers, the U.S. Department of Agriculture's Rural Development housing program has since evolved to serve rural communities in their entirety. Through the USDA's loan guarantee program, the agency agrees to assume as much as 90 percent of the losses on qualified mortgages in the event that they go delinquent. This guarantee, in turn, enables approved lenders to finance as much as 100 percent of the property's appraised value. "[The mortgages] are government-backed so they are guaranteed," says Tammye Trevino, the USDA Rural Development housing administrator. (The USDA also has a smaller, direct lending program that provides subsidized mortgages to very low income borrowers.)
The program only applies to rural areas with 20,000 residents or less. Participating families, meanwhile, must demonstrate that they lack adequate housing but have the wherewithal to remain current on their payments. Since the program is aimed at low- and moderate-income residents, applicants can earn no more than 115 percent of the area's median income to be eligible. "The average credit score is between 670 and 675," Trevino says.
As private players have left the market, the USDA housing program has increased significantly. Roughly 112,000 mortgages have been made so far this year, up from about 55,000 in 2008. "It's more than a 50 percent increase," Trevino says. Even so, USDA-guaranteed mortgages have performed better than other government-backed loans. The USDA's delinquency rate was 12.16 percent in fiscal year 2009, compared with 14.57 percent for the Federal Housing Administration.
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To apply for a home loan through the program, speak with a USDA-approved lender. Consumers can locate USDA-approved lenders by contacting the Rural Development office in their state. Trevino notes that the application process can be lengthy. "We do that second review on 100 percent of the loans," she says.
VA loans: Veterans, members of the reserves, active duty service members, and even some spouses may be eligible for similar home loans through the U.S. Department of Veterans Affairs. By guaranteeing a portion of the mortgage against default, the agency enables VA-approved lenders to offer eligible applicants access to home loans with no money down. "It's really the only [no-money-down mortgage program] out there other than USDA," says Nathan Long, CEO of VAMortgageCenter.com.
Service requirements for VA loan eligibility vary. For example, World War II veterans that weren't dishonorably discharged qualify for the program with 90 days or more of active duty service. But if you enlisted after Sept. 7, 1980, and weren't dishonorably discharged, you will need two years of continuous active duty service. (Click here for a complete list of service requirements.)
But establishing qualified service is only one step in the process. "Every vet who is eligible for the home loan program does not get the home loan. They do have to qualify," says William White, the VA's acting assistant director for loan policy. "You do have to have sufficient income for the loan and you also have to have satisfactory credit." In addition, the size of the loan guarantee is subject to restrictions.
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Should veterans run into financial trouble after receiving their loan, the VA offers additional support, White says. "We will work with borrowers to see if they can encourage the services to modify the loan—in some cases we can buy it ourselves and even lower the rate," he says. White credits such efforts for helping VA loans to outperform their government-backed peers. The seasonally-adjusted delinquency rate for VA loans was 7.79 percent in the second quarter of this year, compared with 13.29 percent for FHA-insured mortgages, according to the Mortgage Bankers Association's most recent National Delinquency Survey. (The delinquency rate for prime, fixed-rate loans was less than 6 percent, however.)
White estimates that the VA will back roughly 300,000 loans this fiscal year, which is down from 325,000 in 2009. (The fiscal year ends at the close of September.) Eligible veterans interested in obtaining a VA-backed loan should contact an agency-approved lender.