Owning your own home has long been a symbol of living the American dream. But for most of us who are not earning an American dream salary owning a home seems completely out of reach.
Turns out USDA loans, give a unique opportunity to make owning a home a reality. This government-backed loan meets low-to-mid income households where they are and with what they have.
We’ve created this guide to tell you everything you need to know about the USDA loan and what you’ll need to get one.
What is a USDA Loan?
| PROS | CONS |
|---|---|
| 0% Down Payment | Geographic Restrictions |
| Low Fixed Interest Rates | Maximum Income Limits |
| You Can Build A Home | Single Family Homes Only |
| Flexible Credit Guidelines | Mortgage Insurance Required |
Before you give your landlord notice and start your search for your dream home, let’s start by clarifying what exactly a USDA loan is, so we can determine if it’s the right loan for you. USDA loans were created as part of the Rural Development Guaranteed Housing Loan program to encourage and assist low-income and moderate-income households to buy homes in rural areas.
These loans are government-backed, do not require any down payment, and have lower interest rates than almost all conventional mortgages.
Yes, you heard that right, no down payments are required.
How Does the USDA Loan Work?
What differentiates USDA loans from conventional mortgages is the fact that the U.S. Department of Agriculture insures them. By doing this they take on most of the risk and this is what makes it possible for lenders to offer low-interest rates and no down payment for USDA loans.
The application process is like any other mortgage application and you will need to meet certain requirements to qualify. But don’t get overwhelmed thinking about the requirements or the specifics of how USDA loans work. We are going to take you step by step through what is needed and make it really straightforward for you to understand.
We should also note that while most USDA loans are offered by private lenders, you can get a direct USDA home loan from the Department of Agriculture if you are a particularly low-income household and have no other possible options.
USDA Loan Qualifications
Who Qualifies for a USDA Loan?
Here are the basic requirements for the USDA loan:
- Be a U.S. citizen, permanent resident, or alien with qualified status
- Have a low to medium household income
- Select a property in a geographical area that is eligible for a USDA loan. Check here to see eligible areas.
- Commit to occupying the property as your primary residence.
There are a few more specific requirements, most of which we will address. But if you have said yes to these four requirements, you are one step closer to getting your USDA loan.
What Disqualifies you for a USDA Loan
While USDA loans may be more accessible for many who would not otherwise qualify for conventional mortgages, there are still a few factors that could lead to a disqualified application. It’s therefore important to have an idea of some of these factors so you can avoid them.
Luckily, most of these factors are things that you have the power to change.
Property Location – You may be disqualified for a USDA loan if you have chosen a property outside of the geographical areas eligible for a USDA. You will be happy to know, however, that 97% of U.S. land is eligible for USDA loans.
Property Issues – Your loan could be disqualified if the property is not accessible without any hazard blocking access to the home, or if the property does not have functioning electrical, cooling and heating systems. There are other home quality requirements that we will delve into below.
Income Issues – You may be disqualified for a USDA loan if your income is over 15% of the median income in your area, though the USDA has on a rare occasion made adjustments. You may also be disqualified if you cannot show a documented and verifiable consistent income. You will usually be expected to show 12-24 months of work history.
Debt Issues – Your USDA loan may be disqualified if your monthly debt exceeds 41% of your gross monthly income.
USDA Loan Credit Qualifications
USDA does not have a minimum credit score requirement. But most USDA loan lenders will require a score of 620 or higher.
However, we all know that life happens and you might find yourself with a lower credit score despite your best efforts. There might have been a medical emergency in the family that financially wipes you out, or you might have gotten into bed with a particularly greedy credit card company.
Don’t worry, if you have a credit score below 620 it’s not the end of the line yet.
You may still qualify for a USDA loan if your lenders agree to accept a lower score if you can prove compensating factors. These are just some of the compensating factors:
- You have little to no debt
- You have a history of making payments (e.g. rent) on time
- You recently graduated with a college degree
- You have savings in your account
If you did have a life event like a medical emergency happen, be sure to share that and back it up with documentation.
What Areas Qualify for USDA Loans
The loan was created for rural development, so rural or semi-rural areas will most likely qualify.
If you live in a suburb, all hope is not lost; 97% of America qualifies for USDA loans including many suburban areas. You can check here to see if your area is eligible.
What Homes Qualify for USDA Loans
Fortunately for potential homeowners, you can get a USDA loan for most types of homes including homes in gated communities, townhomes, certain condominiums, and subdivisions; granted they are within a geographical area eligible for USDA loans.
The home must be used as your primary place of residence and can not be used primarily for commercial purposes.
How Much USDA Loan Do I Qualify For?
One of the first questions that pop into potential homeowners’ minds is ‘how big of a loan can I get?’ Will I be able to get a loan for that beautiful corner house on the street I grew up on?
Chances are you might be able to because there are no limits set for USDA loans.
The amount you will receive will be based on your financial ability to make your mortgage payments and the area you are buying in.
USDA Direct Loans are slightly different when it comes to limits though.
USDA Loan Requirements
You should now have a pretty clear idea of whether you qualify for a USDA loan or not. If you do, it’s time to get into the nitty-gritty details.
By the end of this section, you should have a clear idea of what documentation you need to get together for your application.
DTI Requirements for USDA Loans
Your debt-to-income ratio (DTI) is a useful indicator to lenders of how comfortably you will be able to pay back their loan. The ratio measures how much of your monthly gross income goes towards your monthly debts like student loans, car payments, and child support.
Your DTI should not exceed 41%.
If you have a higher DTI all hope is not lost. You may still be able to get a USDA loan by applying for a debt-to-income ratio waiver.
To qualify for the waiver:
- Your housing ratio must be between 29% – 32%
- Your total ratio must be between 41% – 44%
- Your credit score should be 620 or higher.
You also need to have 1 of these compensating factors:
- The new proposed housing payment is less than or equal to your current housing payments for the last 12 months.
- You have savings worth at least 3 months of the new house payments
- You have been continuously employed with your current employer for at least two years.
USDA Loan Down Payment Requirements
Unlike conventional loans that require down payments and make it impossible for many mid-to-low-income families to purchase their dream homes, USDA loans do not require any down payment. USDA offers 100% financing.
So as long as you meet all the other requirements you can secure a USDA loan and purchase your new home with whatever you have in the bank today.
USDA Loan Employment Requirements
You will be required to show a minimum of 1 year of continuous employment, with USDA recommending that lenders review the previous 24 months of employment.
If you have gaps in employment within this time period for justifiable reasons like medical leave, maternity, or relocation you may still be eligible for the loan but you will have to show documentation to prove your reason.
The final decision is up to your lender, so if one lender does not consider a break in your employment as justifiable, consider approaching another lender with even stronger documentation if possible.
USDA Mortgage Loan Income Requirements
We will keep stressing that this loan is meant for mid-to-low-income households. To qualify for a USDA loan your household income should not exceed 15% of the median income in your area.
This table shows you the 2024 income limits in most US counties per household size.
| Household Size | Income Limit |
|---|---|
| 1-4 members | $103,500 |
| 5-8 members | $136,600 |
If live in an area where properties are particularly expensive, there is a good chance the income limits in that area are higher than the average. You can find out what the household income limit for your area is here.
Home Requirements for USDA Loan
As we mentioned earlier, you can get a USDA loan for most types of homes, granted that they are used as your primary residence. But primary residency is not the only requirement USDA asks for. Your potential home needs to be habitable and have the following features:
- The property MUST be accessible without any hazard blocking access to the home.
- The property MUST be structurally sound. It must have a good roof, no major cracks, and no moisture problems.
- The property MUST have functioning electrical, cooling and heating systems adequate for household functions and appliances. There must also be no exposed wiring.
- The property MUST have a functioning water system including a consistent water supply, plumbing, and a waste removal system.
These requirements must be met to be approved for a USDA loan so keep this list in mind as you are picking your property.
USDA Mortgage Guidelines
Who Offers USDA Loans
We do. USDA guaranteed loans are offered by a range of USDA-approved lenders, each offering slightly different rates and having slightly different requirements. So do your research.
Get in touch with us today to find out more about our rates and get all your USDA loan questions answered.
For USDA direct loans you will apply directly to USDA for your loan. You can find all relevant application documents here.
How to Get a USDA Loan
While each lender/state may have slightly different requirements to get a USDA loan, the steps to getting the loan are the same almost everywhere.
Before we list the steps of how to apply for a USDA loan, we want to stress the importance of getting all your ducks in a row and making sure you have all the necessary documentation required before you start your application process. It will help expedite the process and will eliminate the chance of getting disqualified due to a lack of essential documentation.
With that said, here are the steps for getting a USDA loan:
- Confirm that you qualify for a USDA loan
- Select a USDA-approved lender
- Get Pre-Qualified by a USDA-approved lender
- Get a Pre-Approval
- Find a USDA-eligible home
- Sign a purchase agreement
- Application underwriting and processing
- Close on your loan
Once you have signed your purchase agreement, the process will take about a month or two, on average, before you can close on the loan and get the house keys in your hand.
USDA Underwriting Guidelines for Mortgages
The underwriting process helps lenders determine if giving you a loan is a good idea. For a USDA loan, they will look to see if you fulfill all the applicant requirements and if the property in question fulfills all property requirements.
The vast majority of underwriting for this type of loan is automated and is done using the Guaranteed Underwriting System (GUS). If you do not meet the standard requirements, e.g. a credit score of 620 or above, but you have a justifiable reason, you may need to go through a manual underwriting process. A manual process will require more paperwork and will take more time, but it allows a reasoning person and not a machine to determine your eligibility for a loan, which could prove beneficial for you.
Frequently Asked Questions
Can you get a USDA loan for land?
You may find the perfect piece of land upon which you want to build your dream home and you wonder if a USDA loan can make that dream a reality. Well, you are in luck because you can in fact use a USDA loan to purchase land and build your home. You will just need to ensure you satisfy all the USDA construction loan requirements.
Can you get a USDA loan more than once?
Well, yes and no. You can’t have more than one USDA loan at the same time especially because these loans must be used to buy homes used as primary residences, and you can only have one of those at a time. However, You can get a second USDA loan after you have paid off your 1st one, provided the new property is one you intend to move into and use as your primary residence.
How hard is it to get a USDA loan?
It’s definitely easier than getting a conventional mortgage. Conventional mortgages require down payments, higher credit scores, and more documentation. The USDA loan was created to make owning a home a reality for those who can’t meet the expectations of conventional mortgages. So as long as you qualify for this loan and you can get all the documentation we’ve mentioned in this article together, you’re in with a good shot.
Can you refinance with a USDA loan?
Yes, you can refinance a USDA loan. You may want to refinance your USDA loan for a multitude of reasons, including wanting to take advantage of a lower interest rate, to getting rid of mortgage insurance. You can also refinance into another loan type like a conventional loan, FHA loan, VA loan, etc.
USDA loan vs. FHA loan: Which is better?
While both these loans have similarities, like both being government-backed, they do have their differences. You can do a USDA vs. FHA analysis and decide which is better for you and your situation.
Will You Take Advantage of 100% Financing?
USDA loans are a great way to finance your home by taking advantage of a rare 100% financing offer.
Understanding how USDA loans work, the requirements, and what you need to get approved for one can be understandably overwhelming for some folks. But the good news is we’re here to help.
If you have questions or want to run something by us, feel free to give us a call or you can check your USDA loan eligibility for free on our site in under 30 seconds.
