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Are USDA Loans Available to Everyone? How to Know if You Qualify

Some 97% of land in the US is eligible for a mortgage backed by the US Department of Agriculture if you meet the income requirements.

Rural house with field road
You don't need to come up with a down payment for a USDA mortgage. 
Johner Images/Getty Images

USDA home loans offer a path to homeownership for those with lower incomes and for people who are looking to buy a home in certain areas of the country. 

These mortgages are backed by the US Department of Agriculture as part of its Rural Development program, which promotes homeownership in smaller communities nationwide. If you don't have enough money saved for a down payment or if you've been denied a conventional loan, you may have a good chance of qualifying for a USDA loan. 

Don't rule out a USDA loan for yourself even if you aren't moving to an especially rural region, as many suburban areas qualify, too. This means even if you're moving just outside of a city to get more square footage and land, chances are pretty high that you're moving to a USDA-designated area

Here is everything you need to know about USDA loans, how to qualify for one and whether it's the right type of home loan for you.

What is a USDA loan? 

USDA loans are insured by the Department of Agriculture and have interest rates that are often lower than rates for a traditional mortgage. In contrast to conventional loans and FHA home loans, which both require a down payment, you can qualify for a USDA home loan with 0% down. USDA loans can also be easier to qualify for, even if you've been turned down for a traditional mortgage. 

So why have you never heard of them? There's one major downside: These loans are only available to lower-income buyers in designated USDA rural and suburban locations. And while most of the US landmass is technically considered rural, over 80% of the population live in the 3% of cities and urban areas that are excluded from this loan program.

Types of USDA loans

USDA-guaranteed loans are the most common type of USDA mortgage, but there are also two other types of USDA loans: direct and home-improvement home loans. The lowest-income buyers who may be unable to get a conventional loan might be eligible for a USDA direct loan, financed by the USDA with rates as low as 1%. If you're looking to improve a home you already own, you can also apply for a USDA home-improvement loan or grant.

USDA-guaranteed loans are obtained through a private lender -- like a conventional loan -- but are backed by the government. This offers a major benefit for private lenders because if you default on your loan, the USDA vouches to repay the lender. Just like a conventional loan, if you put down less than 20%, you'll need to pay for mortgage insurance. Because of that government backing, USDA mortgage insurance is cheaper than other mortgage types.

What are the USDA loan requirements?

There are three main factors the USDA considers when determining your eligibility. First, you must buy a home in a designated area. Next, your household income cannot exceed USDA income thresholds for your place of residence: 15% above the local median income. Finally, you'll need a credit score of at least 640, though contributing some cash toward a down payment can negate this requirement. If you meet the first two specifications but have a low credit score, you might still qualify for a USDA direct loan or FHA loan.

Otherwise, the requirements are straightforward. You must be a US citizen, green-card holder or noncitizen national. Your mortgage payment cannot exceed 29% of your monthly income, and your debt-to-income ratio must be no more than 41% of your monthly salary. You'll also need to use the home as your primary residence, have no history of breaking mortgages or commitments to other federal programs, and meet any other lender-specific requirements.

How to apply for a USDA loan

When applying for a USDA loan, you'll need to submit documentation to prove your identity and income levels, just as you would for any financing agreement. Plan on submitting a copy of your driver's license or passport, your Social Security card, your previous two years' tax returns and pay stubs, and recent bank statements.

You may also be asked to turn in additional documentation if you do not have a credit score, apply with nontraditional credit or have unpredictable income. You can review the complete list of requirements on the USDA website.

Advantages of USDA loans

No down payment requirements

If you can't afford a down payment, you can still qualify for a USDA mortgage.

Lower Interest Rates

You can lock in a lower interest rate with a USDA loan than a conventional loan, especially if you have a good to excellent credit score. This could save you tens of thousands of dollars in interest over the lifetime of the loan.

Less expensive mortgage insurance

Although USDA loans do require mortgage insurance called a guarantee fee, it's much more affordable than private mortgage insurance and FHA insurance. You'll pay an upfront fee at closing equal to 1% of your loan amount and 0.35% of the loan amount annually (as of 2021). 

More thorough appraisal

Lenders order an appraisal to determine a property's value before finalizing your loan. This ensures they are not lending you more money than the home is worth, protecting their investment. USDA appraisals have stricter guidelines than conventional loans, which could save you from pulling the trigger on a home requiring expensive repairs.

Designed for low-income buyers

If a conventional lender has turned you down because of your income, a USDA loan can still offer you a path to homeownership. 

USDA loan limitations

Strict income eligibility requirements

USDA loans are not for everyone. They are designated for low-income Americans who cannot qualify for a traditional mortgage

Limited to properties in rural areas

If you live in a city or outside a designated area, you won't be eligible for a USDA loan.

Longer buying process

Guaranteed USDA loans typically have longer application and closing processes since the loans are underwritten twice -- once by the private lender and then by the USDA. 

Pay more over time

Although USDA loans are designed to make homeownership more affordable, the mortgage insurance requirement could mean that you pay more over the lifetime of your home loan.

No option to cancel mortgage insurance

You can cancel PMI on conventional mortgages (and even sometimes on FHA loans) once you reach a certain equity level. The guaranteed fee on USDA mortgages might be cheaper, but it lasts for the lifetime of the loan.

Is a USDA loan right for you?

These mortgage programs are more affordable than traditional mortgages, but they're only possible if you do not exceed the income limits and are buying a home in a designated rural area. If you're just above the income threshold or want to live in a city, you'll need to explore other mortgage options.