What is a USDA loan and am I eligible?

USDA loans allow eligible homebuyers to get zero-down-payment mortgages in rural and suburban areas. 

Because they're backed by the U.S. Department of Agriculture, these loans have lower rates and don't require private mortgage insurance. 

You do have to meet certain income requirements, however, and buy a property within a USDA-approved area.

In addition, not all lenders offer USDA loans, so you'll need to research ones that do.

A USDA loan is a zero-down payment mortgage option providing low- and moderate-income buyers in rural and suburban areas a path to homeownership.

Because the U.S. Department of Agriculture guarantees these loans, lenders offer lower rates and don't require a down payment or mortgage insurance.

The department issues mortgages itself, but USDA direct loans have more stringent income requirements.

USDA repair loans enable low-income households to pay for home improvements. Also known as Section 504 Home Repair, these loans come with a 20-year term, a fixed 1% interest rate and are capped at $40,000.

The USDA also offers grants of up to $10,000 to very-low-income homeowners 62 and older to remove health and safety hazards.

Compared to other mortgages, USDA loans have stringent eligibility requirements.

Income requirements

To qualify for a USDA guaranteed loan from a private lender, your household income shouldn't exceed 115% of the average median income (AMI) in the county where the house is located. The limit is 80% AMI for a USDA direct loan and 50% for repair loans and grants.

You can review the AMI in your area on the USDA website.

Property requirements

To be approved for a USDA loan, the property must be located in a USDA-approved rural or suburban area with a population of 35,000 or less. According to the agency, 97% of U.S. land falls under this category, but you can type an address into the USDA property eligibility map to see if a particular address qualifies.  

Credit requirements

There's no set credit score limit for a USDA direct loan, but a USDA guaranteed mortgage from a private lender typically requires a score of 620 or better.

While most lenders prefer a debt-to-income ratio of no more than 41%, some may approve borrowers with ratios of up to 46%.

In addition, your monthly mortgage (including interest and taxes) shouldn't exceed 29% of your income.

There's no set loan limit on USDA guaranteed mortgages but USDA direct loans, which are available only to low-income households, are limited to anywhere from $398,600 to $919,800, depending on the county the home is located in. (You can check the USDA's area loan limit map to find the limit in your area.)

The maximum for USDA repair loans is $40,000, although homeowners 62 and older are eligible for an additional home improvement grant of up to $10,000.

USDA guaranteed loans are 30-year fixed-rate mortgages, while direct loans have a 33-year term (although some may be extended to 38 years). USDA repair loans have a stanard term of 20 years.

While USDA loans don't come with private mortgage insurance, there are two set fees: An upfront guarantee fee of 1% of your total loan amount and an annual guarantee fee of 0.35%, typically rolled into your mortgage payment each month.

While USDA loans can be a boon to homebuyers in eligible areas, only select banks offer them. These lenders are among some of our top picks for USDA loans.

Guild Mortgage approves USDA loans for borrowers with credit scores as low as 540 and accepts nontraditional credit history, like on-time rent and utility payments, if your credit record is thin or nonexistent.

One of the largest mortgage servicers in the U.S., Flagstar Bank offers USDA loans in all 50 states and its easy-to-use website offers personalized rates and an online application portal.

First, you'll need to see if you're eligible for a USDA loan by checking the income eligibility chart on the USDA website. 

If you do qualify, you'll need to find a property that meets the location requirements. You'll also have to find a lender that offers USDA loans and submit what you would with any other mortgage application: Proof of income, bank statements and other paperwork.

If you're not approved, you can try applying for a USDA direct loan through the USDA's Rural Development office. Direct loans are intended for borrowers who have been unsuccessful in obtaining a mortgage from other lenders.

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