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Everything You Need To Know About A USDA Loan

Sarah Sharkey4-minute read
February 03, 2022

*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.

If you want to buy a home in a rural or suburban part of the country, securing affordable financing is a breeze with the USDA home loan program. Although there are some income restrictions, a USDA home loan could provide the opportunity you need to purchase the home of your dreams.

What Is A USDA Loan?

The U.S. Department of Agriculture provides backing for the USDA loan program. The goal of the program is to help families with low or moderate incomes achieve their dream of homeownership. With a solid footing in homeownership, the hope is that these families can create a better quality of life and build strong rural communities.

If you are able to qualify for a USDA home loan, you will not need to make a down payment for your home purchase. However, you will be required to pay any closing costs that accompany this major purchase.

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How The USDA Loan Program Works

The USDA loan program offers three different options. Let’s dive into each below.

Loan Guarantees

The USDA offers guarantees to mortgage lenders. With that, the USDA guarantees to pay the lender a portion of your mortgage if you default on your loan.

If you have a low income or poor credit score, the USDA loan can help you get into a home with relatively affordable financing. With the backing of the USDA, lenders are more likely to offer favorable terms to you.

Direct Loans

With direct loans, the USDA funds the mortgage directly. Instead of working with a bank, you will work directly with the USDA. If you have a very low income, then this may be one of your only options. A USDA direct loan can help you finance an adequate residence if you fall below their income limits for the area.

Home Improvement

The final piece of the USDA loan program is the home improvement loan component. You can use these funds to repair or remodel your rural home. In some cases, you may qualify for a grant that allows you to take the funds without ever paying them back.

How To Qualify For A USDA Loan

Let’s take a closer look at what it takes to qualify for a USDA loan.

Legal Status

First and foremost, you need to be a U.S. citizen or a qualified alien. Without this most basic qualification, you will not be able to take out a USDA loan.

Location

The USDA has a defined goal of strengthening rural and suburban communities with their loan program. With that, there are location restrictions for where you can use the USDA loan to purchase a home.

You can find out more about the areas in which you can purchase a home with the USDA program on their eligibility website. Take advantage of their map feature to determine whether or not the property you are interested in is eligible for USDA financing.

Income Restrictions

The U.S. Department of Agriculture backs these loans with the intention of assisting Americans that are in economic need. With that, your adjusted gross income can’t be more than 115% of the median income of the area.

The USDA website breaks down the income limits for different areas. You can use the tool to determine the income limit for your area based on the number of people in the household and the age of the loan applicants.

Not only is there an income limit, but you must also prove that you have a reliable income stream. Your income must be high enough to allow you to make on-time mortgage payments for at least 12 months.

Finally, lenders will take a look at your debt-to-income (DTI) ratio. For USDA loans, your DTI must be 50% or lower. Take a minute to calculate your DTI to see if you might qualify for a USDA loan.

Credit

The credit requirements for a USDA loan are not as stringent as other home loans. However, you should have a score of at least 640. If you are sure what your credit score is, then check out Rocket HQSM. You can find out what your current credit score is and learn how to improve it.

How Does A USDA Loan Compare To Other Options?

In general, a USDA loan is an attractive loan opportunity if you are able to secure it.

With the backing of the USDA, you can potentially unlock access to better loan terms. In many ways, these benefits are mirrored by the FHA and VA loan programs. However, USDA loans are dramatically different from conventional loans.

If you’re struggling to build a down payment, then you are not alone. Many home buyers struggle to save enough to cover their down payment. With a USDA loan, you do not need to worry about the traditional 20% down payment that comes with a conventional loan. In fact, you do not need to save for a down payment at all with a USDA loan. However, you will need to save enough to cover closing costs.

Although forgoing the burden of a down payment is useful in the short-term, that will lead to additional costs throughout the course of your loan. These costs are due to a requirement to pay mortgage insurance if you choose to put down less than 20%. You can avoid the monthly cost of mortgage insurance if you are able to put down 20% on a traditional home loan.

Apply Online with Rocket Mortgage®

Get approved with Rocket Mortgage® and do it all online. You can get a real, customizable mortgage solution based on your unique financial situation.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.