Can You Use Down Payment Assistance on a USDA Home Loan?
Down payment assistance is a powerful tool for first-time homebuyers.
But what if you’re buying with a zero-down program like the USDA home loan?
Surprisingly, you can still use down payment assistance (DPA) for zero-down mortgages like USDA and VA loans.
DPA can help reduce your monthly payment, lower out-of-pocket costs, and increase your chances of approval. Here’s how.
Apply DPA Toward Closing Costs To Reduce Out-Of-Pocket Expenses
The name “down payment assistance” is misleading because these funds can also be applied to closing costs in most cases.
Even with a zero-down loan, you need 2-4% of the home’s price for closing costs. This includes appraisal, title insurance, escrow services, and prepaying six months of property taxes.
Your closing cost bill could come to $8,000 or more on a $250,000 home.
This is an expense most first-time buyers don’t consider until they apply. Then they find out they need thousands more dollars than they thought.
This is where down payment assistance comes in handy: You can use DPA to cover your closing costs. Many DPA programs can be used in combination with USDA.
If you’re eligible for both the DPA program and a USDA loan, you could significantly reduce or eliminate your out-of-pocket homebuying costs.
Making an Optional Down Payment With DPA Funds
You have the option to make a down payment on zero-down loans like USDA.
You can use a DPA program to reduce your USDA loan amount and payment. This could benefit you in a few ways, which we discuss below.
But first, how does using DPA on a USDA loan work?
Most DPA programs are “silent second” loans, meaning loans with no monthly payment. You replace a portion of your USDA loan with the DPA loan.
Let’s see how this might play out on a $300,000 home purchase.
Reducing Your Loan Amount
$300k Home | USDA Loan | USDA w/ 3% DPA |
DPA Loan Amount | N/A | $9,000 |
USDA Loan Amount | $300,000 | $291,000 |
USDA Guarantee Fee | $3,000 | $2,910 |
Total Loans | $303,000 | $302,910 |
Total Loans after 3 Years with Forgivable DPA | $291,800 | $283,000 |
This example assumes a DPA loan that is forgiven if you stay in the home for three years (a common structure). At the end of year three, your USDA loan amount is approximately $8,800 less.
Lowering Your USDA Loan Payment with DPA
$300k Home | USDA Loan | USDA w/ 3% DPA |
DPA Loan Payment | N/A | $0 |
USDA Loan Payment* | $1,915 | $1,858 |
USDA Annual Fee | $88 | $86 |
Property Taxes | $300 | $300 |
Insurance | $75 | $75 |
Total Payment | $2,378 | $2,319 |
*Assumes 6.5% interest rate. Example purposes only. Check with a lender for today’s rates.
DPA programs often do not require a monthly payment. In this scenario, the DPA reduces the USDA monthly payment by about $60. No principal or interest is required on the 3% DPA in this example.
Keep in mind that some programs require a monthly payment on the DPA loan. Check your program's terms before you accept the DPA.
Increase Your Chances of Mortgage Approval
Down payment assistance can help you get approved.
DPA often lowers your loan-to-value (LTV). The lower the LTV, the more likely you are to receive an approval.
DPA can help in another way, too: preserving your savings.
A financial reserve fund after closing reduces risk for the lender. If you lose your job, have a medical emergency, or incur unforseen home repair costs, you have a buffer with which to keep making your payment.
If you have $0 in the bank after loan closing, it's harder to be approved for a USDA loan.
But if you use DPA for closing costs, you keep your existing savings intact. Having just a few thousand dollars in the bank after closing can help you get approved.
Check your USDA eligibility with a lender.
Covering Closing Costs If You Can’t Find Assistance
You might have little savings and can’t find an assistance program to cover closing costs.
Related: 7 Places to Find DPA
With a USDA loan, there are other ways to potentially pay for these costs.
Seller concessions: The seller can contribute up to 6% of the home’s sale price toward the buyer’s reasonable closing costs, according to USDA loan rules. Ask your real estate agent how much you should request from the seller.
Roll closing costs into the loan: In rare cases, the home appraisal comes in higher than the purchase price. USDA allows you to receive a loan for 100% of the appraised value, even if it’s more than the price. Use excess funds to pay for closing costs.
Lender credit: The lender may be able to increase your interest rate slightly and credit you back money for closing costs. Check with your lender.
Check Your USDA Home Loan Eligibility
USDA is one of the best opportunities for first-time buyers today. Those who meet income limits and are buying in eligible areas may have access to zero down and low mortgage rates.
