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Do You Qualify for a USDA Loan?

usda mortgage

The U.S. Department of Agriculture has its own mortgage program, but it’s likely one of the least-known about.

The mortgage assistance program is a zero-down payment option for eligible homebuyers in rural locations. A USDA loan is issued through the USDA Rural Development Guaranteed Housing Loan Program by the U.S. Department of Agriculture.

The loan program is intended to help improve the quality of life and economy in rural America. Interest rates are relatively low, along with the no-down-payment component of the loan product. There are a couple of other USDA programs available as well.

How Does a USDA Home Loan Work?

There are three different loan programs from the USDA, although we talk about the most commonly about loan guarantees.

In one program, the USDA guarantees a mortgage issued by a local lender participating in the program, and it’s similar to VA-backed loans. You can get a low interest rate on a mortgage without a down payment, but you will will still need to pay a mortgage insurance premium if you put no money down or pay a low down payment.

The second program is a direct loan, which the USDA issues. This mortgage is for low-income and very-low-income applicants, and the interest rates can be as low as 1% with subsidies.

Home improvement loans and grants are awards that provide outright money to homeowners to repair or make upgrades to their homes. You can also qualify for packages that combine a loan and a grant.

Do You Qualify?

There are income limits for qualification for a home loan guarantee, and these vary by location. Your household size is also a factor. Funding can only be for owner-occupied primary residences to qualify for a USDA-guaranteed home loan.

You need to have U.S. citizenship or permanent residency, and your monthly payment must be 29% or less of your monthly income. That includes your interest and principal, taxes, and insurance. Your other monthly debt payments can’t be more than 41% of your income, but if you have a credit score above 680, USDA may consider a higher debt ratio.

To qualify, you need to demonstrate dependable income, usually for at least 24 months, and you need a decent credit history. None of your accounts can have gone to collections in the past 12 months.

If you have a credit score of at least 640, you’ll get streamlined loan processing. If you’re a borrower with a score below that, you’ll face tougher underwriting standards.

For a USDA-issued home loan, you have to demonstrate you’re in the greatest need of housing. That means that you’re without what’s characterized as safe or sanity housing. You can’t secure a home loan from a traditional source, and you might have an adjusted income at or below the low-income limit for where you live.

For direct loans, the USDA usually issues them for properties that are 2,000 square feet or less, with market values below the loan limit in the area.

A home financed by a USDA loan has to be in a rural location or the edge of a suburban area, as defined by USDA. To determine whether a home is eligible, you can go online, where there’s a USDA eligibility site. You type in the home’s address to find eligibility

Since USDA loans are for those households and families with economic needs, your adjusted gross income can’t be more than 115% of the median income where you live.

Finally, as with a conventional loan, a USDA loan requires an appraisal by an independent third party before the loan is approved, but the purposes of the appraisals are different from one another.

With a conventional loan, the lender wants to make sure they aren’t giving a loan greater than the property's value. For a USDA loan, an appraisal does make sure the value of the property is appropriate for the amount of the loan, but it also makes sure the home meets the standards of the USDA. The house has to be in good livable condition to qualify. For example, the heating system must be operational and up to code.