USDA Loan: What It Is, Eligibility, and How to Apply

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If you prefer farmland over skyscrapers and nature sounds over traffic noise, a special type of government-backed financing could help you make a rural area your permanent home.

U.S. Department of Agriculture (USDA) loans are tailor-made for very low- to moderate-income households that can’t get conventional financing and want to enjoy the stability of homeownership.

Here’s what you need to know about USDA loans, including how to get one:

What is a USDA loan?

A USDA loan can help you purchase, repair, renovate, build, or even relocate a home that you’ll use as your primary residence. In most cases, you’re not required to make a down payment.

If you have low to moderate income and you’d like to be a homeowner in an area with a population below 35,000, you may want to consider a USDA loan.

Learn More: USDA vs. FHA Loans: What’s the Difference?

How does a USDA loan work?

USDA loans work a bit differently depending on which type of USDA loan you’re getting. There are three USDA home loan programs you can choose from:

  • USDA guaranteed loans: These loans are 30-year, fixed-rate loans issued and funded by USDA mortgage lenders, who determine the interest rates. The USDA guarantees 90% of the loan amount to protect the lender if you don’t repay the loan. The income limits for guaranteed loans are higher than the limits for direct loans.
  • USDA direct loans: These loans are underwritten and serviced by the USDA. They can have terms of up to 38 years and interest rates as low as 1%. To qualify, you must have a low or very low income for your area, not be qualified for other financing, and be without decent, safe, and sanitary housing.
  • USDA home improvement loans: Very low-income homeowners who can’t get other credit may be able to borrow up to $20,000 at an interest rate of 1% to repair, improve, or modernize a home in a rural area.

This article will focus on guaranteed and direct loans.

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USDA loan eligibility

You’ll need to meet certain eligibility requirements to qualify for a USDA loan.

USDA eligible areas

Guaranteed and direct USDA loans are available in areas with a population of less than 10,000 and sometimes in areas with a population of 10,000 to 35,000.

Search for the address of a home you’re interested in at the USDA’s eligibility site to see if the home is located in a qualifying area.

USDA property eligibility

You must occupy the home as your primary residence. It can be a single-family attached or detached home. Manufactured homes are also eligible.

It should be accessible by public, all-weather streets maintained by the local government or homeowners association, have a safe and adequate water supply, and have sanitary sewage disposal.

The property’s square footage must also meet USDA requirements:

  • Guaranteed: No specific square footage requirements unless it’s a manufactured home, which must be at least 400 square feet.
  • Direct: Usually 400 to 2,000 square feet of living space (not including basements). Properties typically can’t have an in-ground swimming pool either.
Good to know: You can’t use either type of USDA loan for a property with income-producing features such as a barn, silo, or greenhouse, unless those features aren’t being used or will be taken out of service.

USDA loan income requirements

USDA loans are unique in that you can actually be disqualified if you earn too much. USDA loan income limits depend on whether you’re applying for a guaranteed or direct loan.

  • Guaranteed: You can’t earn more than 115% of the area median income. You also can’t qualify for a conventional loan without private mortgage insurance (PMI).
  • Direct: You must be considered low or very low income. Check the USDA’s direct loan limit tables for your area. However, if you don’t have enough income, you may be eligible for subsidies as long as you can contribute 24% of your income toward your housing payment.

Both loans are adjusted by location and family size. They also require you to have a history of stable income that is expected to continue. In addition, you can’t have too much debt relative to your income. The maximum debt-to-income (DTI) ratio for a USDA loan is 41%.

Good to know: For direct loans, if you have non-retirement assets worth more than $15,000 ($20,000 if you’re elderly), you’ll be required to put the excess into your home purchase.

For example, if you’re 35 years old and have $18,000 in savings, you’ll need to pay $3,000 toward your down payment and/or closing costs.

Find Out: 5 Types of Mortgage Loans: Which One Is for You?

USDA loan credit score requirements

Both direct and guaranteed USDA loans have no minimum credit score requirement. You can even qualify with no score. Lenders will consider your payment history on items that may not appear on your credit report, such as rental payments.

It may be easier to qualify if your score is at least 640. However, under USDA loan rules, lenders can’t reject you based on your credit score.

Tip: You can’t be delinquent on any federal debt, though, and it’s best if you aren’t delinquent on your payments to private creditors, either.

USDA loan interest rate

For a guaranteed USDA loan, lenders get to decide what interest rate to offer you, but the rate must be fixed and the term must be 30 years. Shopping around with multiple lenders can help you get a better rate.

For a direct USDA loan, you can learn about current rates at the USDA’s direct loan webpage. As of Jan. 1, 2022, the rate is 2.50% for low- and very low-income borrowers. Your actual interest rate will be based on market rates and whether you’re eligible for payment assistance, which can slash your rate to as little as 1%. Most direct loans have fixed terms of 33 years.

Good to know: Funding for the direct loan program is available on a first-come, first-served basis each fiscal year. You can put yourself on a waitlist if funds run out.

How to get a USDA loan

The first steps toward getting a USDA loan depend on which type of USDA loan you want:

  • If you’re looking for a guaranteed loan: The USDA’s list of approved lenders is a good place to start. Keep in mind that “approved” is not the same as “recommended.” You should still choose your lender carefully and apply with multiple lenders to find the best deal.
  • If you’re looking for a direct loan: You don’t need to find a lender; you’ll apply to USDA Rural Development. This government agency is your lender. Get started by completing the USDA’s single-family housing self-assessment. If you appear to be a good fit, you can submit a complete application through your local USDA Service Center.

Once you’ve settled on a loan, the process is similar to any other mortgage process:

  1. Complete the loan application. You’ll provide your name, address, phone number, email address, Social Security number, and the address of the property you want to buy. You’ll also provide information about your monthly income, monthly debt payments, and assets, as well as whether you’re past due or delinquent on any debts or have a history of foreclosure.
  2. Get your Loan Estimate. If you can be pre-approved based on the information you provided, you’ll get an official Loan Estimate laying out the interest rate, fees, and length of the mortgage the lender is willing to offer you.
  3. Compare loan offers. If you’re applying for a guaranteed loan, compare your Loan Estimates from each lender who pre-approved your application. Decide which offer is best for you, then let that lender know you’d like to proceed. You’ll only have one offer with a direct loan, since the USDA is the only lender.
  4. Go through underwriting. Once you’ve committed to a lender, the underwriter will verify the information from your application and possibly ask for additional details and documents. An appraiser will verify that the home is worth the amount you and the seller have agreed on. Finally, a title company will make sure the property’s title is clean.
  5. Close on your loan. Closing is the final step of the process. Here you’ll carefully review and sign your Closing Disclosure and pay for any closing costs. Your lender will pay the seller, you’ll get the keys to your property, and you’ll officially become a homeowner.

It’s also possible that the lender will reject your application. If that happens, ask the lender to explain why. This way, you’ll know what you need to change to get approved the next time you apply.

About the author
Amy FontinelleAmy Fontinelle
Amy Fontinelle

Amy Fontinelle is a mortgage and credit card authority and a contributor to Credible. Her work has appeared in Forbes Advisor, The Motley Fool, Investopedia, International Business Times, MassMutual, and more.

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