They also tend to have low interest rates

A Guide to USDA Home Loan Requirements, Eligibility & Income Limits

USDA home loans can help low- to moderate-income individuals and families become homeowners with the help of a 0% down payment and low-interest financing option. Learn about the eligibility requirements to see if it’s the right option for you.

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Last Updated: 10/21/2022
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USDA loans are a mortgage assistance program offered to low- to moderate-income individuals and families. They’re issued through the U.S. Department of Agriculture’s Rural Development Guaranteed Housing Loan program.

There’s no down payment necessary for USDA loans. They also tend to have low-interest rates. However, an applicant must meet the USDA loan requirements. The home should be in a rural area with a population under 35,000. There are also USDA income limits, which may vary depending on the state.

Whether a USDA home loan is right for you or not depends on various factors. While this loan type offers various advantages, it may not always be the best option.

For instance, if you want a home not located in a rural area, you may consider other loan types like conventional loans. USDA loans also require the home to be your primary residence, while conventional loans don’t have this restriction. Additionally, there are income limits set for USDA loans. If you don’t qualify, a conventional loan can be an alternative.

Key Takeaways

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Individuals and families are qualified to apply if they meet the USDA income limits, which may vary depending on the location and household size. Generally, very low- to moderate-income applicants are eligible.

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While there’s no minimum credit score requirement set by USDA home loan programs, lenders may require a certain credit score. In general, having a score of at least 640 makes it easier to get approved.

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For USDA property eligibility, the loan must be for a home used as the primary residence located in a rural area with a population of less than 35,000.

Understanding USDA Home Loans

Before applying for a mortgage, it’s important to understand what a USDA home loan is and how it works. Generally, it’s a mortgaging option available to low- to moderate-income households. Homebuyers can use the loan proceeds to finance a home located in an eligible rural area.

For income limits, states have different requirements. Lenders determine credit score requirements. That said, there are common eligibility requirements. These include the following:

  • The property must be in a rural area with a population under 35,000 and must serve as the borrower’s primary residence.
  • The borrower must be a U.S. citizen or legal permanent resident.

There’s no down payment necessary to get a USDA home loan. Interest rates also tend to be low. While lenders may set credit score requirements, borrowers with a low credit score may still be able to qualify. The USDA guarantees 90% of the loan should the borrower default.

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INTEREST RATES AND PAYBACK PERIOD
  • Currently, the interest rate for USDA Single Family Housing Direct home loans is 3.25% for borrowers in low- and very low-income households.
  • USDA home loans have fixed interest rates. These are based on current market rates at the time of the loan approval or closing, whichever rate is lower.
  • Borrowers can get as low as a 1% interest rate should they modify the loan with payment assistance.
  • The payback period is up to 33 years. Very low-income borrowers may be able to have up to 38 years.
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DOWN PAYMENT AND GUARANTEE FEES

One of the advantages of USDA home loans is having a 0% down payment. That said, USDA home loans include annual guarantee fees. This is because the loan doesn’t require mortgage insurance. Lenders pay the guarantee fees to the USDA. Typically, this fee is part of the borrower’s monthly loan payment.

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AREA LOAN LIMITS

USDA loan limits may vary depending on where the home is located. They may vary even within the same state as counties set different loan limits. You can look at the USDA Rural Development Single Family Housing – Area Loan Limits list to find the maximum loan amount available in your area.

USDA Home Loan Requirements

Knowing the USDA loan requirements can help determine whether you qualify. Take note of the basic eligibility, property, credit score and income limits. Make sure you also ask your lender if there are additional requirements.

Basic Eligibility

There are various factors to consider when determining eligibility for USDA loans. Generally, you must have a low income and the property must be in an eligible location. Additionally, the borrower must meet the following requirements:

  • Doesn’t have decent, safe and sanitary housing
  • Can’t obtain a loan from other resources due to specific terms and conditions that cannot be met
  • Agrees to make the property their primary residence
  • Has the legal capacity to have a loan obligation
  • Has U.S. citizenship or meets eligible noncitizen requirements
  • Hasn’t been suspended or debarred from participating in federal programs

Additionally, the funds should be used to finance a property that:

  • Is generally 2,000 square feet or less
  • Doesn’t have a market value higher than the applicable area loan limit
  • Isn’t designed to be used to earn income

Once approved, the borrower has an obligation to repay the loan amount. Payment terms may vary. Typically, the repayment period can be up to 33 years. However, borrowers in very low-income households may be able to have a repayment period of up to 38 years.

Minimum Credit Score

Applicants must show creditworthiness. Lenders use this to determine a borrower’s ability to repay the loan. Each lender may have a different minimum credit score requirement. That said, having a FICO credit score of at least 640 is ideal as this will help make it easier to pass the USDA’s automated underwriting system (GUS).

Borrowers with a credit score under 640 can still qualify. However, they’ll be subject to manual underwriting. That means they’ll have to go through more stringent guidelines.

Lenders determine creditworthiness by checking the borrower’s credit history. They may also evaluate income and debt. While lenders have different policies and requirements, applicants without established credit likely need to submit other forms for credit verification, like utility payments.

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CALCULATE YOUR MORTGAGE

Knowing how much money you’ll need to purchase your home will help you determine how much you should borrow. Use MoneyGeek’s mortgage calculator to estimate your monthly loan payments.

Property Requirements

USDA property eligibility requirements focus on rural areas. The USDA defines a rural area as a place that is not part of or associated with an urban area and has a population of not more than 2,500.

A location may be eligible if its population is more than 2,500 but less than 10,000 if it’s deemed rural in character. An area with more than 10,000 inhabitants but less than 20,000 is considered rural if it’s not within a Metropolitan Statistical Area and lacks mortgage credit for low- to moderate-income households.

Areas classified as rural before October 1, 1990, may still be considered eligible rural areas if their population is more than 10,000 but less than 35,000 and is rural in character. Additionally, it must have a lack of mortgage credit for low- to moderate-income families. To find out if your area is eligible, use the USDA’s eligibility map.

For a property to qualify, it must be residential and not income-producing. It shouldn’t be large enough to be subdivided. Its value shouldn’t exceed 30% of the as-improved property market value. It should also comply with any applicable zoning regulations.

An eligible property must be considered modest housing. That means its market value shouldn’t exceed the applicable area loan limit. It must meet the standard square footage and not have any prohibited features. Prohibited features include a swimming pool, farm service buildings and other income-producing structures.

Income Limits

USDA home loans are generally designed to help low- to moderate-income individuals. Loan limits may vary depending on your location and household size. These also typically change around May or June annually.

In most cases, the applicant should have an adjusted gross household income not exceeding 115% of the median income in the area. To check the current income limits, check the USDA’s list.

Lenders may also look into the applicant’s debt-to-income (DTI) ratio. This shows how much of your income goes to debt repayment. Lenders may have their own DTI ratio requirements, but the ideal is 45% or lower.

Frequently Asked Questions About USDA Home Loans

You can make a well-informed decision regarding funds by understanding how USDA loans work. MoneyGeek answers some frequently asked questions to help you get started.

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