Am I eligible for a USDA Loan and how do I qualify?

Are you looking to buy, build, or rehab a home in a rural area or the suburbs? Then you should see if you’re eligible and qualify for a USDA loan. USDA loans offer zero down and low-interest rates for home buyers.

With so much information out there, consider this your easy guide to USDA loans. In this blog, we’ll run through all the USDA basics, which includes:

What are USDA loan programs?
What are the types of USDA loans?
Advantages and disadvantages of USDA loans
Am I eligible and how do I qualify for a USDA loan?
What’s the maximum amount I can borrow with a USDA loan?
How to start the qualification process.

What are USDA loan programs?

First, let’s get a basic understanding of what are USDA loans.

The USDA (United States Department of Agriculture) offers loan programs to help eligible borrowers in rural communities buy, build, or repair homes. The goal of the USDA programs is to help borrowers get a loan approval who might not have been able to obtain home financing otherwise. In most cases, this is due to poor credit, low income, or lack of cash for a down payment. USDA loans offer low-interest rates and no down payment on a house for low to moderate-income borrowers.

What are the types of USDA loans?

There are three USDA loans you can apply for:

USDA Guaranteed Loans: Through an approved mortgage lender, the USDA provides a 90% loan guarantee on a mortgage (the government covers the losses if you foreclose on your home). As a result, you can get approved for a mortgage with a low-interest rate and no down payment. However, when you put less than 20% down, you will have to pay a monthly mortgage insurance premium.
Direct Loans (Section 502): This program is specifically for low-income borrowers. The loan can be used to buy, build, renovate, or relocate homes in eligible areas. Interest rates can be as low as 1%. Income thresholds vary by region.
Housing Repair Loans and Grants (Section 504): Compared to buying a new home, this program offers loans and grants for homeowners looking to upgrade or repair their home. Assistance can be up to $27,500.

What are the advantages and disadvantages of USDA loans?

There are some clear cut advantages of USDA loans:

No down payment - with other loan programs, you’re required to put at least a 3.5% down.
Lower interest rates than FHA and conventional loans.
Little to no closing costs - funding from other sources contributes to closing costs and expenses related to the purchase.
Borrowers can qualify with less than perfect credit.

But USDA loans also have their disadvantages:

You must meet income eligibility limits based on your household income.
Only homes in specific rural or suburban areas qualify.
If you have enough income and assets to qualify for other conventional loans, you are not eligible for a USDA loan.
Mortgage insurance is required, although it is cheaper than other loan programs. Once you have enough equity in the home (20%), you can request to stop paying the cost.
USDA loans have a 1% upfront fee. For example, for a $200,000 loan, you’d pay a $2,000 fee right away.
For the Direct Loan program, you’re required to take homeowner education courses.

Am I eligible and how do I qualify for a USDA home loan?

Some of the information above will have already helped you understand some of the qualification standards for USDA loans. Since USDA loans are unique mortgage products, you’ll need to meet some specific standards:

The home must be your primary residence and not a rental property or second home.
The home must be located in a rural area. You can search for approved property addresses for Guaranteed Loans here. For Direct Loans, you can search here.
You must be a U.S. citizen or a non-citizen with qualifying eligibility documentation.
You must meet specific income eligibility limits based on the home’s location. You can search for income limits for Direct or Home Repair Loans here and Guaranteed Loans here. Remember, this is your total household income, which includes your partner’s and your children’s income. The limits vary from county to county.
In most instances, you must have a credit score of at least 640. However, this number may vary.

What’s the maximum amount I can borrow with a USDA loan?

For Guaranteed Loans, the amount you can borrow cannot be more than the appraised value or purchase price of the home, which includes various costs set by the USDA. If the home is new, there may be additional costs as well.

For Direct Loans, the amount you can borrow depends on how much you can repay based on your income, debt, and down payment assistance. In addition, the home you buy or build cannot exceed the area’s loan limits. Some fees can be financed to top the area loan limits

For Housing Repair Loans, you can borrow up to $20,000. If you are a senior, you can obtain an additional $7,500 in grants that do not need to be repaid.

If I think I’m eligible, how do I start the qualification process?

Since the USDA qualification process requires a little extra leg work, we recommend speaking with a loan officer first. They will be able to make sure you meet all the eligibility requirements early. You also may find out you qualify for other loan programs that better fit your scenario. Feel free to reach out to us by using the chat in the bottom right-hand corner of your screen, email, or call us at 855-610-1112.

Also, if you’re still early in your home buying process, we have a free guide for first-time home buyers you can download with no strings attached. Our guide will not only provide you with a step-by-step process for buying a home, but also share insider advice from the people who approve your mortgage.