The U.S. Department of Agriculture (USDA) offers a great financing option for both first-time and repeat homebuyers: a 0% down home loan.
USDA Section 502 Single-Family Housing Guaranteed home loans are aimed at low- to moderate-income borrowers who want to buy a home in eligible rural and suburban areas and who meet USDA loan qualifications.
Eligible borrowers can not only buy a home with no down payment, they also avoid loan limits and typically pay lower mortgage insurance rates than they would on an FHA or conventional loan.
So who meets the USDA loan qualifications? We’ll break down the requirements in this article.
What's in this Article?
What’s a USDA loan?
USDA loans are government-backed mortgages for low- and moderate-income homebuyers who want to purchase properties in qualifying locations.
Although they are sometimes referred to as rural development loans, that’s something of a misnomer, as USDA loans may be used in many suburban areas as well.
The government backing on USDA loans enables private mortgage lenders to approve borrowers who might not qualify for conventional loan programs due to low income or a lack of down payment savings.
The goal of the USDA home loan program is to provide homeownership options in underserved areas and nurture growth in rural and suburban communities. Empowering creditworthy borrowers to purchase homes and invest in their towns is a key way to do that.
The 100% financing option makes USDA loans attractive to first-time homebuyers who have enough income to make monthly mortgage payments but struggle to save up the initial down payment. However, you do not need to be a first-time homebuyer to qualify for a USDA mortgage loan.
What are the USDA loan qualifications?
USDA loans are available to U.S. citizens, permanent residents, and foreign nationals who will live in the home as their primary residence.
However, there are a number of USDA home loan requirements borrowers need to meet before becoming USDA homeowners.
Below, we’ll cover the key USDA loan qualifications for 2021.
USDA loans are intended to boost development in rural and suburban areas. Hence, there are location requirements.
The USDA loan program only applies in qualifying rural and suburban areas, and eligible locations typically fall into the following categories:
- Places where there’s a population of 10,000 or less in areas that are in open country or are rural in character
- Locations where there’s a population of 20,000 or less and not located in a Metropolitan Statistical Area (MSA)
- Areas that severely lack mortgage opportunities for low- and moderate-income borrowers
“Properties and metropolitan cities and counties usually aren’t eligible for USDA home loans. USDA home loans are generally restricted to single-family properties and rural areas and some suburban locations, too,” said Brian Martucci, finance editor for Money Crashers. “Most Americans live in counties that aren’t location-eligible for USDA home loans.”
The good news is, 97% of the U.S. land mass meets the location criteria, so there’s a good chance you’ll find a USDA-eligible area if you’re looking for a home outside of a major city.
If you already have a property or area in mind, you can look it up on the USDA home loan map to find out whether it meets the program guidelines.
In addition to meeting the location eligibility requirements, the home must conform to USDA loan property standards.
Scott Fletcher, President of Risk & Compliance for Fairway Independent Mortgage Corporation, noted that a USDA loan-eligible single-family dwelling can include a detached (stand-alone) property as well as condos, townhomes, modular homes, and some manufactured homes as well. (Fairway owns Home.com.)
Unlike FHA and VA loans (the other government-backed mortgage programs), however, you cannot buy a multifamily property with a USDA loan.
USDA home loan condition requirements include that the home should:
- Be a modest residential property of at least 400 square feet but not more than 2,000 square feet
- Be a primary residence. Second homes or investment properties are not USDA-eligible
- Not have acreage large enough to be subdivided or turned into commercial property
- Be a safe structure with adequate access to water and wastewater systems; have functioning plumbing and electricity; offer safe pedestrian and vehicle access to the property; provide adequate heat, hot water, living space, and sewage disposal; have at least one bathroom with a toilet and bathtub or shower; and have sufficient structural integrity
- Pass USDA appraisal guidelines
USDA property appraisals
Once a seller accepts your offer on a home, your lender will schedule an appraisal with a government-approved appraiser.
The appraiser will review your property and ensure that USDA property condition guidelines are met. If the appraiser flags any areas that fall short of the property standards, they may require that repairs be made before the loan can close. At that point, you’ll need to negotiate with the seller on who will pay for the repairs or back out of the contract and look for another home.
Additionally, the appraiser will evaluate comparable homes nearby to calculate the fair market value of the home. Note that the lender won’t approve the loan if the home’s appraised value is less than the seller’s asking price. In this instance, the price would need to be reduced for the loan to proceed. Or, you would need to pay the difference in cash before the loan could close.
USDA loans are specifically geared toward low- and moderate-income homebuyers. So only borrowers whose earnings fall at or below the USDA loan income requirements will be eligible.
USDA loan lenders evaluate three numbers to verify income eligibility:
- Qualifying income – the borrower’s income to determine repayment ability
- Eligibility income – total household income to determine eligibility for the loan program. This includes income from dependent children
- Adjusted eligibility income – income adjusted after taking deductions for dependent family members and childcare expenses
Martucci explained that income limits for USDA home loans are calculated relative to area median income.
“Since area median income varies by locale, USDA home loan income limits may vary by state and county, as well,” he says.
In general, borrowers must have an adjustable household income equal to or less than 115% of the median income in the area, “with a maximum income of $91,900 for a one- to four-member household or a $121,300 maximum income for a five- to eight-person household,” said Jason Gelios, a REALTOR® with Community Choice Realty in Southeast Michigan.
However, the limit rises much higher for places like Los Angeles, California, where a family of four can make $138,000 per year and still be eligible.
You can check your local USDA loan income limit using the USDA’s income eligibility calculator. To find out the income limits in your area, check out this USDA loan map broken down by income requirements.
Lenders also look closely at borrowers’ credit scores for a USDA loan.
“Also, USDA loan lenders will review your reports thoroughly to make sure you are a trustworthy borrower. So review your three free credit reports thoroughly before applying for a loan,” Miranda suggested. “Correct any errors and dispute false accounts that appear on your credit reports. Mistakes happen frequently, and fraudulent accounts and errors could keep you from being approved for a mortgage.”
If your credit score is below 640, try applying with several different lenders. Some may have more flexible credit requirements than others.
Applying with several lenders is a best practice before getting a mortgage anyway, since it gives you a chance to compare quotes from different companies to ensure you’re getting the most competitive interest rate and overall best deal.
Your debt-to-income ratio (DTI) reflects your total monthly debts, including your mortgage, divided by your gross monthly income.
For example, say you want to borrow $250,000 to purchase a home with a 0% down USDA loan. Assume your total debts were $1,812 – including $1,082 monthly to be paid toward principal and interest on the USDA loan – and your gross monthly income was $4,500. By dividing the former by the latter, you’d calculate a DTI of about 40%.
Miranda recommends aiming for a DTI ratio of 41% or lower, which is generally the maximum allowed for a USDA loan. However, lenders can approve borrowers with higher DTIs for USDA loans if other aspects of their applications are strong — for instance, an excellent credit score or significant savings.
Still, the lower you can get that number before you apply, the better. If your DTI is higher than 41%, work on paying off outstanding debt before applying for a USDA loan.
USDA loan limits 2021
Here’s another great feature of USDA Single-Family Guaranteed Loans: There are no loan limits, or caps on the amount a lender can approve you for on the loan.
However, your finances will determine your borrowing power. Even without USDA loan limits, a lender will cap your loan amount based on your income, credit score, DTI, and down payment.
“The USDA program’s income requirements indirectly curtail loan size, since lenders won’t approve loans likely to create financial hardship for applicants,” Martucci said. “That’s why, depending on the location, USDA loans larger than $400,000 are uncommon.”
There are loan limits for the USDA Single-Family Direct Loan program, but the majority of USDA borrowers take out Guaranteed loans and will not be subject to loan limits. USDA Direct loans are issued by the USDA itself, not through private lenders, and are geared toward very low- and low-income borrowers.
USDA loan qualifications FAQs
To be eligible for a USDA loan, you must purchase a home in a qualifying location and meet the USDA income limit requirements. Lenders will also look at your credit score, debt-to-income ratio, and other factors to determine your creditworthiness and how much you can borrow.
In general, borrowers must have an adjustable household income equal to or less than 115% of the median income in the area of the home for sale.
A home may not be eligible for USDA financing if it is not rural in character, is too small or too large, does not meet USDA appraisal guidelines, and does not pass the USDA appraisal process.
How to get a USDA home loan
A USDA home loan can be a great path to homeownership for those who meet the qualifications.
“It is easier to qualify for and easier to find USDA loans than it has been in the past,” says Fletcher, which is all the more reason to dive in once you know you’re ready to buy a home.
However, making sense of your loan options and the eligibility criteria can seem daunting. Start by getting help from a USDA lender.
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.
Some references sourced within this article have not been prepared by Fairway and are distributed for educational purposes only. The information is not guaranteed to be accurate and may not entirely represent the opinions of Fairway.