If you’re in the market for a new home but have concerns about coming up with a large down payment, the USDA loan program, also known as the USDA Rural Development Guaranteed Housing Loan Program, may help your dreams of owning a home become reality.
Through this program, the U.S. Department of Agriculture (USDA) makes it easier to secure a mortgage loan in qualifying rural areas by offering lower interest rates, no down payments and less stringent credit requirements than conventional mortgages.
Qualifying for a USDA Loan
To qualify for a USDA home loan, both the borrower and the property must meet certain eligibility standards set by the USDA.
Income levels and home loan limits can vary in different parts of the country, so the USDA issues new eligibility guidelines each year. The specific guidelines outline the maximum income levels, credit requirements, debt-to-income ratios, and other requirements for borrowers. The guidelines also specify eligible zip codes and market values for properties that will qualify under the program.
To become eligible for a USDA loan as a borrower, you must:
- Be a U.S. citizen or permanent resident
- Have dependable, documented income (typically two consecutive years)
- Have an acceptable debt-to-income ratio
- Have an adjusted annual income that does not exceed 115% of the area median income, depending on family size
USDA Loan Property Eligibility
Since the purpose of the USDA loan program is to help develop agricultural or rural areas, you can only qualify for a USDA loan on a home that is located in one of the USDA’s designated areas. To find out if a property you’re considering is eligible, you can use the USDA’s online eligibility tool.
To qualify for a zero down payment USDA loan, the property being purchased must:
- Be located in a qualified rural area as set by the USDA (typically areas with less than 35,000 residents
- Serve as the primary residence for the borrower
- Be less than 2,000 square feet in size
- Cannot be an investment property, vacation home, or income-producing property
- Cannot exceed the maximum market value set for the area where the home is located
Like most mortgages, a USDA loan will require a property appraisal as part of the qualification process. To qualify for a USDA loan, the property must be in good shape and structurally sound. This includes:
- Functional heating and cooling systems
- An electrical system in safe operation with no frayed wiring
- Functional plumbing with no major backups or leaks
- A solid foundation and roof
- No evidence of termite damage
- Easy access to the home from a paved or all-weather road
Credit Requirements for USDA Loans
The USDA provides some general credit guidelines, but the exact credit requirements will vary based on your mortgage lender and your unique financial situation. Most lenders look for borrowers with a score of 640 or higher because this allows them to utilize the USDA’s Guaranteed Underwriting System to help expedite the process.
However, many lenders are still willing to help you qualify with lower scores through a manual underwriting process. In these cases, lower credit scores can be offset with higher, stable income levels and low debt-to-income ratios. Or you could qualify with a higher interest rate on your loan to compensate for lower credit scores.
Another eligibility factor that USDA underwriters seek out when evaluating your application is payment history. USDA eligibility requirements specify that a borrower must have “the ability and willingness to repay the mortgage,” which they evaluate by reviewing your credit history to see how well you’ve repaid debts in the past. Generally, you must have no late payments or collections in your credit history within 12 months prior to your application for a USDA loan.
USDA Loan Income Eligibility
Your mortgage lender will expect certain minimum income levels to verify that you are able to comfortably repay your loan. However, the USDA also sets maximum income levels to ensure that the loan program is devoting resources to the target homebuyers in low- to moderate-income households.
These maximum income levels, known as income limits, are based on an adjusted annual basis that sets allowances for common household needs, such as vehicle maintenance, childcare, medical expenses and more. Income limits vary by family size and zip code, and the USDA adjusts these levels each year.
For 2023, the standard USDA income limits in most U.S. counties are:
- $110,650 for 1-4 member households
- $146,050 for 5-8 member households
If your household exceeds eight members, you can receive 8% of the four-person limit for each additional member.
What DTI is needed for a USDA loan?
As with credit scores, a qualifying debt-to-income ratio (DTI) can vary by the lender. However, the USDA guidelines suggest that borrowers should have a DTI of no more than 41%, meaning your mortgage, household bills, and other debts should account for no more than 41% of your income.
In addition, most lenders will typically require that your DTI for your mortgage only, sometimes referred to as a PITI ratio (principal, interest, taxes, and insurance - all the costs associated with your mortgage), does not exceed 29% of your income.
Getting Started With A USDA Home Loan
Once you meet the personal and property eligibility criteria for a USDA loan, you can get started on applying for a loan with no down payment required. In addition to helping eliminate the need for large amounts of up-front cash, getting a USDA loan can save you money over the life of your loan with lower-than-average mortgage insurance premiums and competitive interest rates that rival those of VA and FHA loans.
Since these loans are guaranteed by the USDA, lenders are more willing to be flexible with credit requirements or push for manual underwriting to get you approved, even when minor credit issues are a concern. The first step to getting preapproved for a USDA loan is to match with a lender who can guide you through the process, answer questions, and help you find the home of your dreams.