USDA Loans: Requirements and How to Qualify
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USDA loans give aspiring rural homeowners a shot at homeownership with zero down payment mortgages for qualified buyers. The U.S. Department of Agriculture (USDA) backs these loans, and sets strict requirements for income and the location of your home. Knowing these rules will help you determine if a USDA loan is a good fit for you and your homebuying plans.
What is a USDA Loan?
A USDA loan is a mortgage program that allows homebuyers with low- to average-income to finance homes in USDA-approved rural parts of the country. Qualified buyers can purchase a home with no down payment. The most common USDA mortgage loan is the Section 502 Guaranteed Loan Program which is offered by USDA-approved lenders.
USDA loan types
You can buy, refinance or even build a home with a USDA loan. We’ll focus on the Guaranteed Loan Program, since it’s the program you’ll typically apply for through a USDA-approved local lender.
USDA purchase loans
The USDA loan program is one of only two no-down payment, government-backed loan programs available to qualified homebuyers.The other is the VA loan which is restricted to current or retired military service members.
USDA refinance loans
Homeowners with a current USDA loan can refinance to a lower rate with a USDA refinance loan. Qualified borrowers may be eligible for the USDA streamline refinance, which doesn’t require an home appraisal or any income documentation. One caveat: You must have a current USDA loan to be eligible for any type of USDA refinance.
USDA construction loans
If you want to build a home or place a manufactured home on land you own, a USDA construction loan may be worth a look. This program allows you to roll in the cost of both the construction and the land you’re building into one loan.
USDA direct loans
These specialized loans are made under guidelines in the Section 502 Direct Loan Program, and which provides homebuying assistance to low- and very-low-income borrowers. Unlike the Guaranteed Loan Program, Direct Loan mortgages are approved by the USDA itself, rather than by approved private lenders. Some features of the Direct Loan program include:
- Interest rates of 3.25% for low- and very-low income borrowers
- Interest rates as low as 1% with payment assistance modification
- Up to a 33-year payback period for low-income homebuyers
- 38-year payback periods for very-low earning borrowers that don’t qualify for the 33-year term
USDA loan requirements: How to qualify
Although the basic mortgage process is the same as applying for any other loan, there are strict guidelines unique to USDA loans, including limits on household income and the specific location of your home.
Requirements unique to USDA loans
Income limits. USDA loans are designed to help low- to moderate income borrowers finance home purchases. The standard guidelines cap total household income at 115% of the median household income for your area. The income-eligibility limits vary based on the county and state you intend to live in.
The home must be located in a USDA-designated rural area. You can only get a USDA loan on a home in an area the USDA determines is “rural.” Those areas may change every five years when the USDA conducts reviews to decide if it meets the rural standards based on the following criteria:
- How close it is to urban areas. Usually limited to open country areas that aren’t connected to urban regions
- Population size: Typically less than 10,000, with exceptions up to 20,000
- Density of population. The more people that live in a particular area, the less likely it is to meet the rural definition
Total household income is used to qualify. The USDA loan program is the only government-backed loan that requires borrowers to include the income of every person that will be living in the home, even if they aren’t applying for the mortgage.
Guarantee fees. You’ll pay an upfront and annual guarantee fee which is charged to cover the cost of running the USDA loan program and avoid using taxpayer funds.
- The upfront guarantee is 1% of your loan amount and can be rolled into your loan amount or paid at closing.
- The annual fee is 0.35% of your loan amount and is divided by 12 and added to your monthly mortgage payment.
Standard USDA loan requirements
In addition to meeting requirements specific to USDA loans, you’ll need to meet the regular qualifying guidelines for your credit score, total debt compared to your income (called your debt-to-income or DTI ratio), verify you have the money for closing costs and get a home appraisal to confirm your home’s value.
USDA qualifying requirements
| Minimum down payment | $0 |
| Minimum credit score | No guideline minimum but most lenders require 640 |
| Maximum total debt ratio | 41% Exceptions possible to 44% with 680 credit scores and cash reserves or two-year job stability |
| Appraised value | Must confirm home is in USDA-approved rural area |
| Occupancy | Must live in home as primary residence |
| Guarantee fee | 1% upfront 0.35% annual |
Should you get a USDA loan?
You should get a USDA loan if:
- Your family’s income is at or below the median income limits set by USDA in your area
- You’re OK with only searching for homes within USDA-approved rural neighborhoods
- You don’t have money for a down payment
- You want to buy a manufactured home to set on a rural piece of land
- You want to refinance your current USDA loan to a new USDA loan
USDA loans compared to other mortgage types
If you don’t meet the income requirements, are serving or retired from the military or have more total debt than USDA guidelines allow, you may qualify for other standard home loan programs. The table below gives you a quick glance at the basic qualifying guidelines for each program compared to USDA loans.
| Minimum requirements | USDA | FHA | VA | Conventional |
|---|---|---|---|---|
| Down payment | 0% | 3.5% | 0% | 3% |
| Credit score | No guideline minimum 640 standard | 580* | No guideline 620 standard | 620 |
| Mortgage insurance or similar fee | 1% upfront guarantee fee 0.35% annual guarantee fee | 1.75% upfront premium 0.45% to 1.05% annual premium | 0.5% to 3.6% funding fee | 0.15% to 1.95% private mortgage insurance (PMI) |
| DTI ratio | 41% 44% exceptions possible | 43% 50%+ exceptions possible | 41% exceptions possible | 45% 50% exceptions possible |
| Income limits | Yes | No | No | Yes** |
| Geographic limits | USDA-approved areas only | No | No | No |
*Minimum 580 credit score is required to make a 3.5% down payment; borrowers with a score of 579 or lower would need to make a 10% down payment.
**Unlike most conventional loan programs, Fannie Mae HomeReady® and Freddie Mac Home Possible® first-time homebuyer programs set income limits
USDA vs. FHA loans
FHA loans are insured by the Federal Housing Administration and have a lot of similarities to USDA loans. Both programs are government-backed and charge upfront and monthly fees to be approved. However, FHA loans require a 3.5% down payment and a minimum credit score of 580.
USDA vs. conventional loans
Conventional loans are made by approved lenders that follow rules set by Fannie Mae and Freddie Mac. You’ll need at least a 3% down payment to qualify for a conventional loan, compared to a USDA loan. However, most conventional loan programs don’t set any income limits. You may also be able to waive mortgage insurance with a 20% down payment and even be eligible for an appraisal waiver.
USDA vs. VA
Loans guaranteed by the U.S. Department of Veterans Affairs (VA) give military borrowers access to no-down-payment mortgages that don’t require mortgage insurance. Eligible VA borrowers may have to pay a funding fee that is usually rolled into the loan amount.
Pros and cons of USDA loans
| Pros | Cons |
|---|---|
You may not need a down payment You can buy or build a home in rural parts of the country You’ll pay less in upfront and annual fees than FHA loans | You’ll pay upfront and annual guarantee fee charges You and your family may make too much money to qualify for the program You’re limited to picking homes in USDA-approved rural areas |
Frequently asked questions
The current USDA loan interest rates for the Guaranteed Loan program vary based on which USDA-approved lender you choose. As of Nov.1, 2022, the interest rate for the Direct Loan program is 3.25%, with rates as low as 1% for borrowers eligible for payment assistance.
Yes. The low-income limits and restrictions on where you can buy a home make the USDA loan more difficult to qualify for than other loan types that don’t have the same requirements.
No. The USDA home loan programs aren’t limited to first-time homebuyers but are limited to primary residences.
The processing time can vary depending on fund availability, completeness of application and the demand in the area in which you’re interested in buying.
No. However, USDA guaranteed loans require something similar to mortgage insurance in the form of upfront and annual guarantee fees. USDA direct loans don’t require the guarantee fee since they aren’t approved by outside lenders.
Yes. You can use the Section 504 Home Repair program for improvements on your existing home, so long as you meet the age, location and income requirements.
Yes. You may refinance your USDA mortgage under three specific refinance offerings, which are non-streamlined, streamlined and streamlined-assist.
For USDA direct loans, borrowers are subject to area loan limits. USDA guaranteed loans don’t have a maximum loan size limit, but the income and debt ratio caps will limit how much house you can qualify for.
No. USDA loans can only be used for primary residences, not second homes or investment property.