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Buying & Selling a Home

Goodbye, City Life

The USDA offers mortgages for homes in rural locations that are not as far out of town as you might think.

The mortgage-loan menu is as short as a hot dog stand's these days. No more subprimes and interest-onlys for buyers with the ability to sign their name 25 times in a single sitting. And borrowers have to twist some arms to get an adjustable-rate mortgage.

But first-time buyers with little cash can get a zero-down mortgage under a little-known program run by the U.S. Department of Agriculture -- as long as they are willing to buy a home in a "rural" area. The government's definition of rural probably doesn't match yours. Bedroom communities outside most small cities qualify, including homes as close as 20 miles to downtown Hartford, Conn., 12 miles from Savannah, Ga.'s historic district, less than 30 miles from the White House in Washington, D.C., and just 20 miles outside Dallas.

There are a few other catches: You cannot own a home when you apply. Your income may not exceed 115% of the median in your area. (For example, the income limit in the Newark, N.J., area is $92,600; outside Dallas, the limit is $78,550; near Savannah, Ga., the limit is $74,050.) The mortgage payment, including taxes and insurance, is usually limited to 29% of monthly household income, and total debt, including the mortgage payment, is limited to 41% of monthly household income.

Loans backed by the Federal Housing Administration remain the mortgage of choice for would-be homeowners with limited cash. But the FHA has tightened its lending standards, and you need a down payment of at least 3.5%. Plus, FHA loans require borrowers to carry mortgage insurance, and they limit seller concessions, such as money toward closing costs. USDA loans have no such restrictions. The loans are offered through most commercial lenders.