USDA Loan Eligibility
More and more of us are moving outside major metro areas, a good reason to know about USDA loan requirements and USDA loan eligibility. The increased use of remote work since 2019 and generally lower housing prices are making rural areas increasingly desirable, places where the best available mortgage options often involve the US Department of Agriculture (USDA).
The USDA program offers several types of mortgages, each designed to serve a different part of the rural community. Established in 1949, USDA loans are intended to support the development of affordable housing in rural areas.
In basic terms, USDA mortgage options for buyers look like this:
Single Family Housing Guaranteed Loan Program. Allows borrowers to purchase homes with nothing down and liberal credit requirements. The money comes from private lenders, and the federal government guarantees repayment.
Single Family Housing Direct Home Loans. This program is designed to help low and very-low-income households buy or improve homes in rural areas. The Direct program can also provide payment assistance in some cases.
USDA mortgages are specifically designed for rural area residents and can include significant benefits.
The USDA loan program does not require a minimum credit score. Instead, private lenders determine the credit scores they will accept. Borrowers may be able to get financing that might be denied with other loan programs because of more liberal credit standards.
Rural areas make up approximately 74% of the U.S. land area, encompassing vast regions beyond major metropolitan hubs. With the expansion of metro areas and the increasing accessibility of high-speed internet, many locations that were once considered remote are now closely connected to urban centers, offering greater opportunities for work, commerce, and community growth.
The government has many ways to define which areas are “rural” and which are not. The Congressional Research Service has 22 pages of definitions, fortunately it’s much easier to look up an address with our specialized USDA property eligibility map.
The USDA program is open to a wide variety of borrowers, but there are limitations.
Cash. USDA mortgages require zero down. While the loan requires nothing down, there can be significant closing costs for such things as transfer taxes, title insurance, and “escrow” funds. An “escrow” fund or “trust” account is the money a lender collects each month to pay such costs as property taxes and property insurance. Money is needed at closing to start the account.
Documents. Lenders want evidence that borrowers have the ability to repay mortgage financing. They will ask for such evidence as W-2 forms, pay stubs, and tax returns to document the borrower’s ability to repay the debt. With your permission, lenders can get certain documentation directly from the IRS and banks. By getting information electronically, there is less for borrowers to provide on paper and the application process can be speeded up.
Lenders want to know how much you earn each year to qualify for mortgage financing, and they also want to know how much of your money goes to monthly debts. This is done in two ways.
First, with the USDA loan guarantee program, as much as 29% of your gross monthly income can be used for such costs as mortgage interest, mortgage principal, property taxes, and property insurance (PITI).
Second, as much as 41% of your gross monthly income can be used for housing costs PLUS student loans, credit card payments, auto payments, etc.
In other words, if you have a gross household income of $8,000 per month then $2,320 (29%) can go to housing costs, and $3,880 (41%) can be used for all regular debts.
These percentages may be flexible for those with strong credit, solid cash reserves, and other compensating factors. Learn more about USDA credit requirements here.
Lenders make USDA-guaranteed loans available to borrowers with nothing down because if something goes wrong and the loan is not repaid, the federal government will pay off the lender. The guarantee fee comes in two forms.
First, there is a 1% upfront fee. If you borrow $250,000 the fee is $2,500. To save cash, this amount can be added to the loan.
Second, there is also a .35% annual fee. This fee is paid monthly. For example, if there is a $250,000 loan amount and a $2,500 upfront guarantee fee, the amount being financed is $252,500. Multiply this sum by .35% and the amount is $883.75. Divide by 12 and the monthly cost is $73.65. Learn more about USDA guaranteed mortgage costs with our calculator.
The USDA mortgage programs are designed to help low- and moderate-income borrowers and often work well for first-time purchasers. There are income limits, at this writing generally $112,450 for a household with four people, and $148,450 for a household with five to eight individuals. The limits are tailored to local areas and in some cases can be higher. Learn more about income requirements for USDA loans here.
Loan amounts are determined by an applicant’s repayment ability, rather than a fixed maximum purchase price. Additionally, there is no strict acreage limit, provided the land size is typical for the area and aligns with local housing standards.
The program is designed to finance prime residences. Investment properties are not allowed, and using a property to produce income is generally prohibited.
Zoning rules across the country are currently in flux. Long-standing single-family zoning regulations are being replaced by updated guidelines that permit more than one unit on traditional lots. Property owners are adding “accessory dwelling units” – ADUs. ADUs can be financed under USDA rules, but not in all cases.
ADUs that serve as additional living space for household members, such as in multigenerational homes, align with the goals of this program. However, ADUs intended to generate rental income are not eligible.
If you move, however, and decide not to sell the property, it can be rented out as long as the mortgage is each month as required.
*Reference: Housing Assistance Council Report
