With low-interest rates and minimal upfront payments, the USDA loan is an excellent option for low- and moderate-income buyers interested in rural land. Here we’ll break down the qualifications for the USDA loan to see if it’s a good option for you.
What Is A USDA Loan?
USDA loans are low-interest loans with little to no down payments created by the United States Department of Agriculture to incentivize property purchase in rural areas. Though not as well-known as other government-backed options like FHA and VA loans, USDA loans are great, accessible options for non-wealthy buyers interested in living outside busy cities in more rural areas.
What is the USDA?
The USDA mortgage loan is one of many programs offered by the United States Department of Agriculture, which regulates and promotes agricultural, rural, and forested communities and industries for the federal government. By providing a loan incentive to buyers of rural land, the USDA hopes to foster growth within rural and agricultural communities and offer opportunities to low-income buyers who might not qualify for traditional loans.
How to Get a USDA Loan
To qualify for a USDA loan, applicants must meet credit score and household income requirements that vary by region. There are three types of home loans offered by the USDA: guaranteed loans, direct loans, and home improvement loans and grants.
Guaranteed loans are offered through local lenders, just like FHA and VA loans. Because the government promises to back that loan, the lenders are incentivized to offer lower down payments and interest rates.
Specific eligibility depends on regional household income averages, but guaranteed loans are available to low- and moderate-income households.
The USDA offers direct loans with low-interest payments to applicants that meet very low-income requirements who can’t qualify for traditional mortgage options. If you are eligible for a direct loan, interest rates can fall lower than 1%.
Home Improvement Loans and Grants
Loans for home improvement are also available to low-income households and can often be combined with a grant to offset home repair costs.
How to Qualify for a USDA Loan:
- To qualify for a USDA mortgage loan, you first need to check that the property you’re interested in is eligible. The USDA website provides an interactive map that shows eligible properties.
- Once you have found a property covered by the USDA loan, you will need to make sure that you meet the correct requirements (more on that later). To do this, you’ll need to find documentation of your U.S. citizenship, bank statements, and records proving your household income.
- If you are applying for a guaranteed USDA loan, find a USDA-approved local lender. The USDA website provides a list of all approved lenders in the country. Contact a lender to determine if you need to take any more steps to qualify for the USDA loan.
Will I need to buy mortgage insurance?
USDA loans require buyers to pay mortgage insurance in the form of an annual guarantee fee, which breaks down into two types of payments: the up-front guarantee fee you pay when you sign onto the loan and the monthly guarantee fee.
The up-front guarantee fee is 1% of the entire loan cost and can often be financed into the loan, meaning that it’s not always due at the time of closing. The monthly guarantee fee is .35% of your loan amount and is broken down into monthly payments that are due along with your mortgage. Compared to the FHA loan’s .85% monthly insurance payments, the USDA rates are much more affordable.
What are the interest rates for a USDA loan?
USDA interest rates are consistently lower than FHA and conventional loan options by about .5%. As with any home mortgage loan, however, interest rates for the USDA loan will vary depending on the property’s value and the buyer’s credit score and financial history. To get the best idea of interest rates, applicants should contact a handful of USDA-approved lenders to get their personalized rates and compare options.
USDA Loan Requirements
As with any government loan, USDA loans come with strict requirements that determine an applicant’s eligibility. Here are some of the criteria to look out for.
To apply for a USDA loan, you must claim the property in question as your primary residence. A USDA loan won’t cover a vacation home, rental property, or land that you intend to use for commercial purposes, like a farm or a business.
Rural Area Qualifications
The USDA loan was created to encourage the buying and development of rural land, which means that the loan won’t cover property in cities or many suburban areas.
There is, however, some wiggle room when it comes to how rural the property has to be. The USDA’s interactive map will help you determine what areas have properties eligible for the loan. Property types that qualify for the loan differ depending on the state and county you’re looking for, and you might be surprised to see properties covered in some relatively suburban areas.
Down Payment Requirements
Guaranteed and direct USDA mortgage loans do not require a down payment. However, remember that a guaranteed USDA loan will still need an up-front insurance premium of 1% to 2% of the loan amount.
It’s also important to remember that as with any home purchase, buying a home with a USDA loan will still come with closing costs as with any home purchase. Closing costs vary by lender but typically costs 3-5% of the purchase price. There are options to roll closing costs in with the mortgage loan, but these are considered on a case-by-case business by your lender and government requirements.
You can apply for a USDA loan with a credit score as low as 640. Some lenders will consider lower scores but will probably examine your credit history and financial situation more closely.
Because the USDA loan incentivizes middle- to low-income households, your income plays a big part in determining eligibility. To qualify, your adjusted household income has to fall at or below 115% of the median family income in the area where you are looking to buy.
Standard debt-to-income requirements for USDA loan qualification fall around 29% / 41%. Some situations might allow for qualification with a DTI ratio as high as 34% / 46%, but as with your credit score, this will be evaluated on a case-by-case basis.
Possibilities with a USDA Loan
The USDA mortgage loan allows buyers to make low-interest payments and buy property without putting money down, offering more accessible options than FHA and conventional loan options.
With minimal closing costs and varying types of eligibility for different income levels and needs, this mortgage option helps buyers who have good credit and can maintain monthly mortgage and insurance payments. If you are a low-income or middle-income household and are looking to buy property in a rural area, the USDA loan is a great option to consider in pursuing your search for a home.
This page last updated: March 29, 2022