USDA loans are guaranteed loans from lenders with favorable terms to prospective homeowners. They’re open to any family with a modest income.
USDA rural development loans are gaining popularity for one big reason — they don’t require a down payment. Most feature very flexible, convenient terms and low mortgage interest rates.
If the family uses the home as their primary residence and it’s in a USDA-eligible area, they can take advantage of the loan’s benefits and affordable mortgage payment plan.
Although rural properties are the primary focus of USDA loans, they’re not exclusively reserved for farmland homes. The loans target areas with populations under 35,000, including small towns and remote suburban areas that qualify.
They can be used to finance existing homes, newly constructed houses, and a limited number of manufactured homes.
Two types of USDA home loans
USDA loan programs offer two structures for financing home purchases. In the USDA Guaranteed Loan Program (a.k.a. the 502 Guaranteed Loan Program), loans are issued by banks and other approved financial institutions.
The USDA guarantees lenders against losses if the homeowner defaults, lowering those institutions’ risk. Officials hope that kind of deal will spur further development in the community.
In the direct loan program, the USDA issues the loan themselves. Direct loans are aimed specifically at families with low to extremely low incomes. They also offer payment assistance through subsidized interest rates.
While guaranteed loans can only be applied toward the purchase of the home, direct loans can be used for construction, repairs, renovation, and relocation expenses.
How to qualify for a USDA loan
Although USDA loans are typically user-friendly for those with low income, applicants must meet a few qualifications to move forward.
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To qualify for a USDA mortgage loan, the property must be in an eligible location. Generally, any address that’s not in a large city or a densely populated suburban area can qualify for the loan. Surprisingly, 97% of U.S. land is in an eligible region. You can easily find out whether your property is in an approved area using an interactive map.
The USDA defines eligible locations as “rural areas,” even if they don’t seem that rural. Within those regions, there are tiered income levels with varied population limits.
For example, areas with populations of 10,000 or less are automatically eligible. For populations between 10,001 and 20,000, the property cannot be in a major statistical area.
For populations between 20,001 and the upper limit of 35,000 to qualify, the area must have prior status as a rural zone according to the 1990, 2000, or 2010 censuses; it must also retain its “rural character.”
In addition, areas with populations between 10,001 and 35,000 must usually demonstrate a shortage of approved mortgages for low- and middle-income residents. Even then, the USDA retains the right of final decision as to its eligibility.
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Annual income is a key deciding factor in determining USDA loan amounts. The potential borrower must have a consistent record of stable income and a good credit history. The household’s annual income must be held to 115% of the area in which the eligible house is located.
The guaranteed loan program has a few conditional income standards regarding zip code and household size. You can consult the USDA’s eligibility tool to find out whether your home and household size qualify.
Be aware that the USDA counts all the income your household generates. If you work in a medical office and you have an 18-year-old child who works in food service, both of your incomes are considered for the loan.
In the direct loan program, the income threshold is drastically low, depending on state limits and regulations. You can find out your state’s upper loan limits with another interactive USDA map.
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The USDA does not have an established credit score for taking out a loan. However, the lending agencies do have a floor of 620. Some lenders might require a minimum of 640, as that score triggers streamlined credit analysis from the USDA’s Guaranteed Underwriting System.
If your credit score is lower than 620, you may still have a chance to get a USDA Direct Loan. In this case, the USDA may want to offset the credit score with a low debt-to-income ratio, a sizable savings account, or other factors that limit their risk exposure.
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Your debt-to-income ratio is a measure of how much of your income goes to monthly bill payments and how much is left over. These bills include mortgage payments, car or student loans, credit card minimum payments, and other loan payments. These bills are all added together to represent your monthly gross income.
The DTI ratio is determined when you divide your monthly debt by your gross monthly income. The result is then multiplied by 100 to reflect that data as a percentage — that’s your DTI ratio.
Lenders like to see lower DTI ratios. They demonstrate your ability to pay bills yet still have ample money left over for living expenses. Normally, a DTI ratio of 36% or less is considered “good,” and a ratio between 36% and 43% is deemed “moderate.” A DTI ratio higher than 43% may require higher scrutiny by the lender.
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The loan limit on a USDA direct mortgage is the maximum amount of cash a homeowner can borrow. Acceptable limits vary by county and hinge on whether you get a direct or guaranteed loan. USDA guaranteed mortgages do not have a maximum defined loan limit.
As of March 2024, most of the rural areas USDA guaranteed loans cover have a standard limit of $398,600. Higher-cost counties have higher limits between $431,400 and $919,800.
Some counties are so high cost or densely populated that standard USDA loans aren’t available. You can consult the USDA’s Loan Eligibility Map to see your county’s loan limits.
Types of USDA loans
The USDA’s loan program is further divided into four types.
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USDA Rural Development
The Rural Development loan is intended to spur rural growth. It applies to purchasing, building, renovating, and refinancing single-family homes.
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USDA Rural Streamline Refinance
This loan program helps current USDA borrowers refinance their existing mortgages for lower interest rates. To qualify, the borrower’s current mortgage program must have been active for 12 months. Limits vary according to location.
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USDA Streamline Assist Refinance
The Streamline Assist Refinance program is for those with limited home equity. To qualify, the homeowner must have 12 straight months of timely mortgage payments and consistent income. Borrowers may make smaller monthly payments.
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USDA Repair and Rehabilitation
Also called a Section 504 loan, this USDA renovation loan program targets meager income borrowers who need to repair, improve, or upgrade their current home. The program uses a combination of loans and grants to fund projects.
How to get a USDA loan
To get a USDA loan, potential borrowers must follow this sequence of steps:
- Determine eligibility by consulting online USDA maps.
- Decide whether you want a guaranteed or direct loan. Guaranteed loans will have higher income limits, which you’ll work out with the lending institution.
- Submit all applicable paperwork, including income, debts, and credit reports.
- After pre-approval, begin searching for new homes (or launch renovations on your current home).
Keep in mind that you’ll have fees associated with your loan. Guaranteed loans require an upfront 1% fee and annual fees of 0.35% for as long as the mortgage is active.
Additional potential fees include:
- Origination fees
- Title insurance and services
- Processing fees
- Closing costs
- Credit report fees
- Appraisal costs
- Discount points to buy down the loan’s interest rate
USDA loans offer the chance to purchase or renovate homes in rural counties, building the backbone of American prosperity.
If you’re unsure whether they’re right for your position, they’re worth talking over with a mortgage advisor.
