USDA Loans, also known as rural development loans or Section 502 loans, are a mortgage type guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, a part of the U.S. Department of Agriculture. Available to qualified buyers in rural and certain suburban areas, these loans can be used to purchase, repair, or relocate a home or prepare a site for a home. They are primarily designed to help people with very low to moderate incomes secure safe, affordable housing.
Requirements for Qualifying
To qualify for a USDA Loan you must meet the following criteria:
- Property Type: This must be your primary residence. Additionally, the property must have:
- Access to a road, street, or driveway
- Adequate utilities, water supply, and sewage disposal
- A structurally secure foundation and roof
- Functional heating, cooling, and electrical systems
- Income: You must have stable, consistent income. Your household’s total income must be within 115% of your area’s median income.
- Residence status: You must be a U.S. citizen, non-citizen national, or qualified alien.
- Credit scores for eligibility: You must meet minimum lender credit requirements, typically at least 620.
- Debt to income ratio: As there is no downpayment, you’ll need a DTI of 41% or less.
- Monthly payment criteria: The monthly payment on the loan must be 29% or less of your monthly income. This includes principal, interest, insurance and taxes. All other monthly debt payments must not exceed 41% of your income.
- Location: The home must be in a designated USDA rural area.
To determine the income limit for your county, refer to this USDA map.
Types of USDA Loans
Guaranteed
With a guaranteed loan, the USDA guarantees the bulk of the loan in order to reduce the risk for lenders. This often leads to better loan terms for borrowers, e.g. lower interest rates and no down payment.
Direct
Direct loans are intended for low-income or very-low income borrowers- the repayment period of the loan can be extended beyond 30 years to allow for lower payments in extreme financial circumstances.
Home Improvement Loans and Grants
These combo loans build in the land purchase price and the construction costs of building a home. These loans are based on the final assumed appraised value in reviewing the home site and build plans.
Pros & Cons of USDA Loans
Pros
- No down payment is required
- No strict loan limits on guaranteed loans
- Applicable for both purchasing and refinancing
- Sellers can cover closing costs
- Penalty-free repayment options
Cons
- Upfront and annual fees
- The property must be located in designated USDA areas
- The property must be a primary residence
- The buyer’s income cannot surpass a specified limit
- If it’s a direct loan, the loan size may have limits
- Comprehensive underwriting process with a longer timeline for closing with a USDA loan than most other loan types
Do USDA Loans Have PMI?
No, private mortgage insurance (PMI) is not required with USDA loans. Instead, you’ll need to pay an upfront guarantee fee and an annual fee. The latter acts as the monthly mortgage insurance premium.
USDA Loan Limits
USDA loans have both loan limits and income limits. USDA loan limits (the total loan amount) vary by county across the US. Currently, the loan income limit varies by state and county as well, based on the # of people who will reside in the home.
USDA Loan Takeaways
If you qualify for a USDA loan, it is an excellent option with no downpayment and relaxed credit requirements. It’e certainly worth considering if you have low to moderate income and dreams of owning a home.
Be sure to explore all the different types of loan types before deciding which one is best for your situation. Use our mortgage calculator to forecast loan amounts and monthly costs.
