If you’re having trouble saving up a down payment to buy a home, the U.S. Department of Agriculture (USDA) might have a solution for you.
Hold up, you might think. What does the USDA have to do with buying a home?
The USDA encourages development in less-dense communities throughout the country by backing 0% down home loans.
That’s right — not 20%, 5%, or even 3%. Eligible homebuyers in qualifying rural and suburban areas can get a mortgage with zero money down.
The only catch? Your household income must be at or below USDA loan income limits.
There are two sets of USDA loan income limits: one for the USDA Single-Family Direct Loan program and one for USDA Single-Family Housing Guaranteed Loans.
The USDA Single-Family Housing Direct Loan program is for very low- and low-income homebuyers, defined as making less than 50% (very low) or 80% (low) of the area’s median income. Direct loans are issued by the USDA itself, rather than by private lenders, and may be harder to obtain.
USDA Guaranteed Loans, which make up the majority of USDA loans, are issued by private mortgage lenders and insured by the federal government. These are for low- and moderate-income borrowers.
The USDA Guaranteed Loan Program is a great option for first-time homebuyers, thanks to the zero down payment requirement and competitive interest rates. Repeat homebuyers can also qualify for a USDA mortgage; there’s no first-time homebuyer requirement.
But there are hard and fast income limits.
Income limits for both programs are based on where you live, and they max out at 115% of the area median income (AMI). Limits look vastly different depending where you’re buying a home, since they’re tied to local incomes.
Local income limits
In Butler County, Ala., the very low income (Direct loan) limit for a 1-4 person household is $27,550, while the moderate income threshold for Guaranteed loans is $91,900. In Greeley, Colo., the very low income limit is $44,250 for a single homebuyer and the moderate income maximum is $101,800.
Looking at income limits, it’s easy to see why many more people qualify for the Guaranteed program.
Household size also affects the local USDA income limit. If you are looking at a home near Santa Ana, Calif., for example, USDA loan income limits are $156,250 for a family of four and rise to $206,250 for a family of eight.
Those maps don’t tell you everything, though. USDA lenders calculate your eligibility based on adjusted household income, meaning what’s left after certain deductions. You might initially appear over the limit, but after deductions, you could still qualify.
Income is a key factor in qualifying for a USDA home loan. But calculating your income for USDA loan eligibility is a little more complicated than with other loans.
Not to worry, though — a USDA lender can run the numbers for you. Still, it helps to understand what they’ll look for.
USDA lenders look at three numbers to determine income eligibility:
- Qualifying income
- Eligibility income
- Adjusted eligibility income
Qualifying income refers to the borrowers (or co-borrowers’) income, and lenders use it to determine whether you can afford the monthly mortgage payments on the loan amount you’ve requested.
Your lender will need proof of income, including your base income and any overtime, bonus, or commission earnings you’ll use to qualify. In order to use overtime, bonuses, and commission, you’ll need to show proof that these are consistent sources of income and that they’re likely to continue after you’ve closed on the home.
USDA lenders would like applicants’ debts to be about 41% or less of their gross income. As an example, someone could qualify with $5,000 in monthly income and about $2,050 in debt payments monthly, including future housing costs.
Eligibility income includes your entire household income. It’s what lenders use to determine whether you’re within the USDA loan income limits for your area.
To calculate this number, lenders will need income records for all members of your household, even those who are not borrowers on the loan.
If a relative lives with you and has a part-time job, you’ll have to disclose their income. Same goes for a dependent child who earns an income and will live in the home with you.
The household income cannot exceed the area income limits — not just your income as the borrower.
If your gross household income is above the income limit, you may still qualify after taking deductions. The USDA allows lenders to make the following allowances when calculating household income:
- $480 per minor child or disabled adult who is a non-borrower or co-borrower and is not the borrower’s spouse
- 100% of childcare expenses
- $400 for either a borrower or co-borrower 62 years and older (only one deduction per loan)
- Medical expenses that are more than 3% of the household income, if the borrower is elderly or expenses are due to a household member’s disability
Note that only one deduction for a senior household member is allowed per loan. If both your parents are older than 62 and both live with you, you’d only be able to deduct $400 from your household income.
If you’re wondering whether you meet the income eligibility requirements, you can plug in your income and deductions into the USDA income calculator. It will ask you questions about the people in your household and your income sources, and then calculate whether your income is eligible for a USDA loan in the area you’d like to buy a home.
Or you can apply with a USDA lender. They’ll run the numbers for you and tell you whether you’re eligible.
Related reading: USDA Loan Qualifications & Loan Limits 2021
USDA loan guidelines are flexible on a number of factors, but not on income and location. To qualify for a USDA rural development loan, your income must be at or below the income limit in your area and you must buy a home in an eligible suburban or rural area.
But if you’re not eligible for a USDA loan, you may qualify for another low or no down payment home loan program:
- VA loans: These 0% down loans are available to veterans, active-duty servicemembers, and eligible surviving spouses.
- FHA loans: The Federal Housing Administration (FHA) backs these low down payment loans, which enable borrowers with credit scores of 580 or higher to buy homes with 3.5% down. There are no income limits and they can be used anywhere in the country
- Conventional loans: A number of conventional loan programs allow homebuyers to purchase houses with just 3% down. Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible are geared toward low- and moderate-income buyers. But the Freddie Mac HomeOne program does not have income limits, and all of these programs can be used nationwide
Related reading: Top 12 No Down Payment Mortgages for 2021
USDA loan income limits FAQ
The USDA income limits are 115% of the area median income and are based on household size. In many areas, the limit for a USDA Guaranteed loan is $91,900 for a family of 4 and $121,300 for a household with up to eight people.
USDA loans are meant to increase homeownership among very low-, low-, and moderate-income borrowers in qualifying rural and suburban areas.
U.S. citizens, permanent residents, and foreign nationals who are unable to qualify for a conventional mortgage may be eligible for a USDA loan as long as their household income is equal to or less than 115% of the area median income. Borrowers must buy a home in a USDA-eligible location.
They must also meet lender and program criteria for credit score, debt-to-income ratio, and other financial factors.
Yes. The USDA loan program is designed to help very low- to moderate-income borrowers become homeowners. Household income must be at or below 115% of the area median income to qualify for a USDA loan.
A USDA mortgage loan can be a great tool for achieving homeownership, particularly if you earn a modest income.
The next step is to get preapproved to find out whether you are eligible for a USDA loan.
USDA Guaranteed Rural Housing loans subject to USDA-specific requirements and applicable state income and property limits. Fairway is not affiliated with any government agencies. These materials are not from USDA or RD and were not approved by USDA or RD or any other government agency.