What Is a USDA Loan? Am I Eligible for One?
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Perhaps you feel more at home surrounded by pastures than pavement. If so, buying a home might be well within reach, thanks to the U.S. Department of Agriculture mortgage program. In fact, the USDA might have one of the government’s least-known mortgage assistance programs.
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As a part of its Rural Development program, the USDA invested almost $20 billion in 2014 to help nearly 140,000 families buy and improve their homes. The progrmoram is designed to “improve the economy and quality of life in rural America.” It offers low interest rates and no down payments, and you may be surprised to find just how accessible it is.
With all types of mortgage loans to choose from, how do you know whether a USDA loan is right for you? Here’s an overview of how it works and who qualifies:
How USDA loan programs work
There are three USDA home loan programs:
Loan guarantees. The USDA guarantees a mortgage issued by a participating local lender — similar to FHA- and VA-backed loans — allowing you to get low mortgage interest rates. even without a down payment. If you put little or no money down, you will have to pay a mortgage insurance premium, though.
Direct loans. Issued by the USDA, these mortgages are for low- and very low-income applicants. Income thresholds vary by region. With subsidies, interest rates can be as low as 1%.
Home improvement loans and grants. These loans or outright financial awards permit homeowners to repair or upgrade their homes. Packages can also combine a loan and a grant, providing up to $27,500 in assistance.
Qualifying for a USDA-backed mortgage guarantee
Income limits to qualify for a home loan guarantee vary by location and depend on household size. To find the loan guarantee income limit for the county where you live, consult this USDA map and table.
USDA guaranteed home loans can fund only owner-occupied primary residences. Other eligibility requirements include:
- U.S. citizenship (or permanent residency).
- A monthly payment — including principal, interest, insurance and taxes — that’s 29% or less of your monthly income. Other monthly debt payments you make cannot exceed 41% of your income. However, the USDA will consider higher debt ratios if you have a credit score above 660.
- Dependable income, typically for a minimum of 24 months
- An acceptable credit history, with no accounts converted to collections within the last 12 months, among other criteria. If you can prove that your credit was affected by circumstances that were temporary or outside of your control, including a medical emergency, you may still qualify.
Applicants with credit scores of 620 or higher receive streamlined processing. Those with scores below 580 must meet more stringent underwriting standards. And those without a credit score can qualify with “nontraditional” credit references, such as rental and utility payment histories.
How USDA-issued home loans work
Going one step further in helping prospective homebuyers, the USDA issues mortgages to applicants deemed to have the greatest need. That means an individual or family that:
- Is without “decent, safe and sanitary housing”
- Is unable to secure a home loan from traditional sources
- Has an adjusted income at or below the low-income limit for the area where they live.
The USDA usually issues direct loans for homes of 1,800 square feet or less, with a market value below the area loan limit. Again, that’s a moving target depending on where you live. Home loans can be as high as $500,000 or more in pricey real estate markets like California and Hawaii, and as low as just over $100,000 in parts ofrural America. A loan limit of $216,840 is typical in many areas of the country.
Eligible home locations
Metropolitan areas are generally excluded from USDA programs, but pockets of opportunity can exist in suburbs. Rural locations are always eligible.
To apply for a USDA-backed loan, talk to a participating lender. If you’re interested in a USDA direct mortgage or home improvement loan or grant, contact your state’s USDA office.
A program sponsored by the USDA might seem to be targeted to farmers and ranchers, but your occupation has nothing to do with the qualification process. Eligibility is simply a matter of income and location. And no, you don’t need to know sorghum from a soybean.
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Like other mortgage loans, any fees (or assistance ) are amortized (built in) into the loan payments. To get complete details, you should talk to your local USDA office.
Renee Lann Phillips
Thanks and Good Luck.
Christopher Dello Russo
Do you know if there is any penalty for earning more than the maximum income limit AFTER signing up for a USDA Guaranteed Loan?
I m eligible now, but I was looking to get my own business started in a year or two.
Hi Christopher Thanks for reaching out to NerdWallet! We would suggest contacting a USDA approved lender (http://www.rd.usda.gov/files/SFHGLDApprovedLenders.pdf ) or USDA office in your state (http://www.rd.usda.gov/contact-us/state-offices ) for the answer.
My friends mother recently received a letter informing them of foreclosure. They were not given a chance to pay what was owed in payments and could not afford to pay the full amount at once. The house was set for action two weeks ago but did not receive any letter until today. The letter reads that have an apportunity to continue paying for the house of they meet certain requirements, with an even lower payment. How truthful is this, if at all? What are the repercussions in either case?
Hi Roman Thanks for reaching out to NerdWallet! There are some programs willing to help homeowner s facing foreclosures (http://portal.hud.gov/hudportal/HUD?src=/topics/avoiding_foreclosure ). However, you should immediately contact your lender to discuss the situation. A local attorney who is knowledgeable regarding foreclosures may also be helpful. The important thing is to act ASAP.
Sarah Morrison Lynn
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