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Spring House Hunt: The $0 down payment mortgage that buyers overlook

Buying Spring House Hunt
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Whether in search of more space or more affordable prices, many pandemic-era home buyers, newly untethered from their daily commutes, have been house hunting far outside Boston.

So far outside the city, in fact, that they may be eligible for a USDA loan, a lesser-known mortgage product backed by the United States Department of Agriculture. USDA loans have nothing to do with farming, and they offer some enticing perks for low- and moderate-income home buyers — namely, the possibility of getting a home loan on a primary residence with zero down payment.

“USDA is a wonderful option for rural borrowers, primarily because it offers 100 percent financing,’’ said Julienne Joseph, associate director of government housing programs at the Mortgage Bankers Association. “So there’s no minimum down payment required for rural borrowers.’’

The principal downside to a USDA loan is that, unlike a MassHousing or Federal Housing Administration (FHA) mortgage, there are geographic restrictions: The loans are intended to encourage homeownership specifically in rural areas.

But you needn’t venture too far from Boston to reach USDA country. Eligible areas include plenty of pleasantly pastoral suburbs and coastal communities very much associated with Greater Boston, such as Sudbury and Sherborn, Ipswich and Essex, Easton and Bridgewater, and much of Cape Cod, according to the USDA’s online eligibility map. Some properties in Hopkinton — famously 26.2 miles from downtown Boston by foot — also qualify.

There are two main types of USDA single-family mortgage programs. USDA Direct Loans are offered by the agency itself to low- and very low-income borrowers, and can feature longer loan terms (up to 33 or even 38 years), payment assistance, and subsidized interest rates between 1 percent and 2.5 percent. However, USDA Direct Loans also carry the most restrictions: They can’t be used to buy a home with an in-ground swimming pool, for example.

The more accessible USDA mortgage is the Guaranteed Loan. These mortgages are issued by private lenders but carry the explicit backing of the federal government, and they are also available to moderate-income households. As of 2020, Boston-area borrowers could earn up to $154,900 a year, or north of $200,000 for families of five or more, and still qualify for a USDA Guaranteed Loan. In most other areas of the state, the income limits ranged from $110,850 to $112,850, and from $146,300 to $148,950 for a large family.

Individual lenders may have their own credit requirements or underwriting criteria, but USDA loans offer some flexibility when it comes to credit. Borrowers with a credit score above 640 can typically get streamlined approval; those with lower scores but otherwise strong applications may be able to gain approval as well if they explain their situation and can demonstrate alternate sources of creditworthiness, such as a history of on-time rent payments.

“If a mortgage can’t be automated through digital underwriting, if they can’t get a clean approval that way, most programs allow for some level of manual underwriting that allows the human touch, for an actual underwriter to take into consideration any explanation that the borrower may be able to provide,’’ Joseph said.

Rates on USDA loans tend to be fairly competitive with conventional mortgages, Joseph said. “All interest rates are pretty subject to investors and can vary from lender to lender,’’ Joseph said, “but typically, USDA rates are competitive with any other programs.’’

There are other downsides, though. While most lenders require borrowers to pay private mortgage insurance if they can’t make a 20 percent down payment, USDA borrowers don’t need to pay PMI, even if they’re making no down payment at all — which is a nice plus. However, to keep the program fiscally stable, the USDA charges a pair of fees to lenders, which are typically passed on to borrowers.

The first is an upfront “guarantee fee’’ currently equal to 1 percent of the loan total, according to Bankrate, which can be rolled into the mortgage. A separate annual fee, currently 0.35 percent of the remaining balance per year, is paid monthly.

Federal loan programs also have a lingering reputation for sometimes sluggish responsiveness, but Joseph said the agency has worked to speed up turnaround times. “I know that USDA has made some significant strides in the last couple of years to ensure that their processing is as efficient as possible, to ensure that there aren’t any lags in turnaround times in order to close,’’ Joseph said.

Finally, USDA loans are a fairly niche product — only 475 were issued statewide during the last fiscal year, according to a USDA spokesperson. So after verifying a property’s eligibility at usda.gov, you’ll want to find an approved lender who has some experience with the process.

Jon Gorey blogs about homes at HouseandHammer.com. Send comments to [email protected]. Follow him on Twitter at @jongorey. Subscribe to our free real estate newsletter at pages.email.bostonglobe.com/AddressSignUp.