Mortgage 101

USDA Loans: How to Qualify and Borrowing Requirements

Published on: May 16, 2022

usda loan

If you’re buying a home in a rural community, you might qualify for a USDA loan. These loans are guaranteed by the U.S. Department of Agriculture (USDA) and offer an affordable homeownership path to low- and moderate-income borrowers in approved rural areas.  
 
To qualify for a USDA loan, you’ll need to meet location and income limit requirements. Learn how these loans work, key borrowing requirements, and how to apply.

How does a USDA loan work?

Most USDA loans are backed by the USDA and are offered through approved lenders. A USDA mortgage loan typically has lower interest rates than other types of loan programs and doesn’t require a down payment in many cases. These loans are designed to make homeownership more accessible to low- and moderate-income Americans and those who may not qualify for a conventional loan.

Depending on your financial circumstances, you may be eligible for one of three USDA loans:

Guaranteed USDA loan

The Guaranteed USDA loan insures part of your loan in case you default on your mortgage payments, allowing lenders to offer lower rates. This helps eligible USDA borrowers purchase homes in qualifying rural areas with up to 100% financing. You can find these loans through USDA-approved lenders such as Finance of America Mortgage.

USDA Direct loan

On the other hand, USDA Direct loans are funded and provided to borrowers directly by the USDA, which acts as the lender. Qualifying criteria are generally the same as the Guaranteed USDA loan program, though interest rates may differ.

The USDA Direct loan program is meant for low- to very-low-income borrowers purchasing homes in designated rural areas who can’t qualify for a USDA Guaranteed Loan. Borrowers may receive a subsidy depending on household income.

USDA Home Improvement Loan

The USDA home improvement loan assists low-income homeowners to improve or repair their current homes. In some cases, borrowers may receive a grant that they don’t have to repay. Qualifying requirements for these loans include age and income limits.

Do I qualify for a USDA loan?

Eligibility for a USDA loan generally falls under two major requirements: income and location. Applicants need to meet the USDA loan income limits, which cannot exceed 115% of the median household income in your area. For instance, borrowers with a household size of three people who wish to purchase a home in Jacksonville, North Carolina, can’t make more than $47,500 in total annual household income.

Borrowers also need to purchase homes in a qualifying rural area. In general, locations with a population of up to 35,000 are eligible. However, it’s best to check the USDA loan eligibility map to see whether the home you want to buy is eligible.

To qualify for a USDA loan, the home must be the borrower’s primary residence, and you must show a willingness to repay the loan. The USDA doesn’t set a minimum credit score, though lenders may have their own requirements. Finance of America Mortgage, for instance, requires a minimum 600 FICO score on its USDA loans. Borrowers may be able to use alternative credit to qualify for a USDA loan if they don’t have a traditional credit history.

How to qualify for a USDA Guaranteed loan

Aside from the income and location requirements, borrowers need to purchase a single-family home that meets the minimum property standards set by the U.S. Department of Housing and Urban Development (HUD). Borrowers also can’t have been rejected from other federal programs. Additionally, applicants must prove their income sources, and their monthly housing payments can’t exceed 29% of their gross monthly income.  

How to qualify for a USDA Direct loan

USDA Direct loans also require borrowers to be eligible for federal programs. Applicants also need to prove they’re willing to make mortgage payments and be at or below the low-income limits for the property’s area.  

Other requirements include: 

  • Borrowers don’t have access to safe or sanitary housing. 
  • Borrowers can’t qualify for other types of home loans. 
  • Borrowers must meet the USDA’s loan limits for their area. 

There are also property requirements

  • Property generally can’t be more than 2,000 square feet. 
  • Property can’t have an in-ground swimming pool. 
  • Property can’t be used to generate income (i.e., a rental property).

Here’s a chart comparing the loan requirements for both types of USDA loans:

 Loan requirements  USDA Guaranteed loan  USDA Direct loan 
Minimum credit score  None from USDA, but lenders impose their own minimums; FAM’s minimum is 600  None 
Household income limits  No more than 115% of median area income  No more than 115% of median area income 
Eligible locations  Must be within a USDA-approved rural area  Must be within a USDA-approved rural area 
Loan limits  No limit (based on income limit)  Depends on area 
Property requirements  Must meet HUD requirements  Must meet HUD requirements; property also can’t have an in-ground pool, be more than 2,000 square feet, and used to generate income 
Loan term  30 years  Up to 38 years 

How to apply for a USDA loan

To apply for a USDA loan, start by checking the eligibility requirements to see if you qualify. The USDA website provides an eligibility map and a chart for income limits. USDA also provides a self-assessment tool you can complete to determine eligibility.  

Gather all relevant documents, including bank statements and proof of income, before reaching out to a USDA-approved lender to apply for a mortgage. Contact a local Finance of America Mortgage Advisor to start the USDA loan application process today.

USDA loan FAQs

How long is the process for getting a USDA Direct loan? 

Your processing time will depend on various factors, such as funding and program availability for USDA loans in your area and whether you submit all required documentation on time.  

What credit score do I need for a USDA Direct loan? 

There are no credit score requirements for a USDA Direct loan. In general, as long as you have some form of credit history and can prove you’re willing to make loan payments, you can qualify.   

Which should I pick – a USDA or FHA loan? 

Both USDA and FHA loans are backed by the government, making them attractive options for borrowers who don’t qualify for conventional loans. USDA loans have rural location eligibility requirements; FHA loans do not. FHA loans have a 3.5% minimum down payment requirement; however, most USDA loans require zero down.

Can I refinance my USDA mortgage? 

Yes, you can refinance a USDA loan like you can with other types of mortgage loans. The USDA has several refi options, and your lender may offer its own USDA refinance programs, too. 

How do I check the status of my USDA loan? 

To find out the status of your USDA loan, check with your lender or the Rural Development office in your area if you applied for a USDA Direct loan. 

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