Are you looking to buy a home in a rural area but don’t qualify for a conventional mortgage? USDA loans may be a great option thanks to 100% financing and flexible credit standards. This guide will explain what USDA loans are, eligibility requirements, how to apply, and whether a USDA mortgage is right for your home purchase.
The U.S. Department of Agriculture (USDA) offers home loan programs to help low to moderate income buyers purchase homes in rural areas. These government-backed mortgages from the USDA offer significant benefits like low interest rates and require no down payment.
While USDA loans have income and location eligibility standards, they are more lenient regarding credit scores and debt-to-income ratios than conventional mortgages. USDA loans can help rural homebuyers overcome obstacles to homeownership.
What Types of USDA Loans Are Available?
The USDA offers two main mortgage programs:
USDA Guaranteed Loan
- Issued by approved lenders
- USDA guarantees the loan
- Must meet eligibility requirements
USDA Direct Loan
- Funded directly by the USDA
- Limited availability/funding
- Targets very low income borrowers
The Guaranteed loan program is most common, with over 2,000 approved USDA lenders nationwide providing financing. But the Direct loan can be an option for buyers unable to get approved for the Guaranteed loan.
What Are the Eligibility Requirements for USDA Loans?
To qualify for a USDA home loan, borrowers must meet criteria regarding:
Income Limits
No precise income cap, but household income must be below the limit for the area, typically 115% of the median income.
Location/Property Eligibility
The home must be located in a USDA-designated rural area. Check eligibility maps to confirm.
Credit History
No minimum credit score, but expect scrutiny of credit. Manual underwriting considers explanation letters.
Debt-to-Income Ratio
DTI limit is 29% for housing costs and 41% for total debt. Higher may be allowed with strong compensating factors.
Citizenship
At least one borrower must be a U.S. citizen. Permanent resident aliens may also qualify in some cases.
Meeting these requirements is necessary to get USDA approval. But they are more flexible than conventional mortgage requirements.
How Do I Apply for a USDA Home Loan?
Follow this step-by-step process when applying for a USDA mortgage:
- Check property and income eligibility requirements using the USDA tools
- Get pre-approved to confirm you meet debt-to-income ratio requirements
- Choose a USDA approved lender and submit a full application with documentation
- Complete the underwriting process including verification of income, assets, and credit
- Order an appraisal through a USDA approved appraiser
- Close on your new home once the loan is cleared for approval!
Having your financial ducks in a row will make the application process much smoother. Your lender will guide you through every step.
How Do USDA Loans Compare to Conventional Mortgages?
USDA loans offer more relaxed standards than conventional loans in a few key ways:
Down Payment
USDA requires 0% down. Conventional loans typically need at least 3-20% down.
Credit Score
No minimum score for USDA. Conventional loans often require 620+ FICO.
Debt-to-Income Ratio
USDA allows up to 41% DTI. Conventional loans stick to 36% max DTI.
Location
USDA is for rural areas only. Conventional loans work in any location.
These lenient standards help buyers who may fall outside conventional loan qualifications still achieve homeownership.
What Are the Pros and Cons of USDA Loans?
USDA mortgages offer great benefits but also some potential drawbacks to weigh:
Pros
- 100% financing with no down payment
- Fixed low interest rates
- Lenient credit score requirements
- Higher debt-to-income ratios permitted
- Low mortgage insurance costs
Cons
- Limited availability in rural areas only
- Stricter income limits than conventional loans
- Upfront guarantee fee of 1% of loan amount
- Potentially a longer approval process time
- Must meet property/repair requirements
Make sure to assess the tradeoffs when considering a USDA loan. While not right for everyone, they provide an excellent option for eligible buyers in rural locales.
Should You Apply for a USDA Home Loan?
Here are some signs that a USDA mortgage may be a good fit:
- You want to buy in a rural area designated as eligible by the USDA
- You have limited funds for a down payment
- Your credit score falls between 500-640
- Your total debt ratios exceed limits for conventional loans
- You need a low down payment option like FHA but want even lower costs
USDA loans fill an important niche for rural homebuyers who may struggle to get approved through conventional financing channels.
The Bottom Line
Thanks to 100% financing and relaxed credit standards, USDA home loans open the doorway to homeownership for many buyers in rural locales. Compare the pros, cons, and eligibility requirements to conventional mortgages. If you meet the criteria, a USDA loan can help you buy a home even with imperfect credit or limited funds for a down payment.