USDA loan requirements and eligibility in 2024

By: Marcos Zambrano

Updated on: July 12, 2024

The Low-Down On USDA Loans

Designed by the United States Department of Agriculture (USDA), these loans were created with a specific goal in mind: to help make homeownership accessible and affordable for those in rural and suburban areas. At its core, a USDA Loan, also known as the USDA Rural Development Guaranteed Housing Loan Program, is a zero-down mortgage for low-to-moderate income families.

USDA Loans offer numerous benefits, making them an attractive option for many homebuyers. For one, they require no down payment, a feature unique to this loan type along with VA Loans. Secondly, they offer below-market mortgage rates, making monthly payments more manageable. Finally, they offer lenient eligibility criteria, allowing more people to qualify than some conventional loan programs.

So, if you’ve been dreaming of owning a home but are worried about high down payments, stringent credit requirements, or expensive mortgage insurance, a USDA Loan might be the solution you’re looking for. In this guide, we will take a closer look at these loans, covering everything from benefits and qualifications to the application process.

Read on and discover how USDA Loans could be your gateway to owning your dream home, no matter where it is.”

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What Is A USDA Loan?

A USDA Loan, formally known as the USDA Rural Development Guaranteed Housing Loan Program, is a mortgage loan product backed by the United States Department of Agriculture. This program was created to assist low-to-moderate income households in purchasing homes in rural and suburban areas. 

Born out of the Department of Agriculture’s commitment to strengthen rural communities and improve the quality of life for rural Americans, USDA Loans have been instrumental in fostering homeownership where it’s often most needed yet least accessible. USDA Loans aim to promote prosperity by ensuring that these often underserved communities have a fair shot at homeownership. 

So, How Does A USDA Loan Work?

Essentially, the USDA guarantees a mortgage issued by a participating local lender — this allows borrowers to benefit from low mortgage interest rates and zero down payment, something almost unparalleled in other mortgage products. To put it simply, if a USDA Loan borrower defaults for any reason, the USDA will pay the lender back a portion of what they are owed, reducing the lender’s risk.

There are two types of USDA Loans: the Single Family Housing Guaranteed Loan Program and the Single Family Housing Direct Home Loans. The former is the most common and is what people usually refer to when they talk about USDA Loans. This program helps approved lenders work with low-to-moderate income families living in rural areas to make homeownership a reality. 

On the other hand, the Single Family Housing Direct Home Loans, also known as the Section 502 Direct Loan Program, helps low- and very-low-income applicants obtain decent, safe, and sanitary housing in eligible rural areas by providing payment assistance, a type of subsidy that reduces the mortgage payment for a short time.

It’s worth noting that ‘rural’ doesn’t necessarily mean ‘remote.’

Many properties located on the outskirts of metropolitan areas can qualify for a USDA Loan. In fact, you might be surprised at how expansive the USDA’s definition of ‘rural’ can be. 

Overall, USDA Loans provide a fantastic opportunity for those looking to own a home in less densely populated areas. They democratize access to homeownership, helping families who may not qualify for traditional mortgages to own a home.

What are the Benefits Of USDA Loans

USDA Loans come packed with a suite of benefits that make them an attractive option for many potential homeowners, particularly those eyeing properties in rural or suburban areas. Let’s delve into the key advantages that make these loans stand out:

No Down Payment

One of the standout benefits of a USDA Loan is the zero down payment requirement. This feature significantly lowers the upfront costs associated with purchasing a home, making homeownership accessible for individuals and families who may not have large savings set aside.

Low Interest Rates

USDA Loans usually come with interest rates that are either at or below the market rate, making them more affordable in the long run. The lower interest rates mean lower monthly payments, which can ease the financial burden on families.

Flexible Credit Guidelines

USDA Loans have lenient credit requirements compared to conventional loans. Even if you don’t have a perfect credit score, you can still qualify for a USDA Loan. This flexibility opens the door to homeownership for people who may otherwise struggle to qualify for a mortgage.

No Maximum Purchase Price

Unlike other mortgage programs, USDA Loans don’t have a maximum purchase price limit. The loan amount is determined by your ability to repay the loan based on your income and other financial factors. This gives borrowers greater flexibility in the housing market.

Mortgage Insurance Savings

While USDA Loans do require mortgage insurance, the cost is often lower than that of other loan types. The reduced insurance cost can lead to significant savings over the life of the loan.

Use for New Construction, Repairs, and Relocation

USDA Loans can also be used for new home construction, making repairs or improvements to an existing home, or even relocating a home. This wide range of uses makes USDA Loans a versatile tool in the journey to homeownership.

These benefits underscore the value of USDA Loans as an affordable, accessible path to homeownership. They’re particularly beneficial for low-to-moderate income families seeking to buy a home in areas where traditional financing might be out of reach.

How To Qualify For A USDA Loan in 2024: What You Need To Know

Qualifying for a USDA Loan is often simpler than other loan types due to its flexible requirements. However, there are still several criteria to meet:

Income Limits

USDA Loans are intended for low-to-moderate income families. Your income should not exceed 115% of the median income for the area where you intend to live. The USDA uses adjusted income limits that consider the number of people in a household.

Primary Residence

The property you purchase must serve as your primary residence. USDA Loans are not intended for investment properties or vacation homes.

Credit Score

While the USDA does not set a minimum credit score, many lenders require a score of at least 640. However, if your score is lower, don’t be discouraged; some lenders may still work with you, especially if you have a steady income and a good payment history.

Property Location

The property you wish to purchase must be located in an eligible rural or suburban area as defined by the USDA.

Steady Income

Applicants must show a steady income for at least 24 months and meet certain debt-to-income ratio limits.

Eligible Property Types

Eligible property types include new and existing homes, approved condominiums, modular homes, and certain types of manufactured homes.

Keep in mind that even though these are general guidelines, lenders may have their own additional requirements. It’s always a good idea to contact a reputable lender to discuss your situation and learn more about the qualification process for USDA Loans.

Today's USDA loan rates (As of July 12, 2024)

What is the process of getting a USDA loan?

Applying for a USDA Loan follows a similar process to other mortgage applications, with a few additional steps due to its unique nature. Here’s a step-by-step guide to navigate the process:

Step 1: Prequalification: Begin by prequalifying with a USDA-approved lender. During this phase, you’ll provide the lender with basic information about your income, assets, debts, and credit score. This will give you an idea of how much you might be able to borrow.

Step 2: Home Search: With prequalification in hand, start your home search. Remember, the property must be located in a USDA-eligible rural or suburban area.

Step 3: Loan Application: Once you’ve found a suitable property, you’ll complete a full loan application with your chosen lender. You’ll need to provide more detailed financial information and consent to a credit check.

Step 4: Property Appraisal: The lender will order a property appraisal from a USDA-approved appraiser to ensure the home meets USDA standards and the purchase price is justified.

Step 5: Loan Processing and Underwriting: The lender will review your application and make sure all details align with USDA requirements. The underwriting process may require additional documents.

Step 6: Closing: If your application is approved, you’ll move to closing. Here, you’ll sign all final documents, pay any closing costs, and receive the keys to your new home.

Remember, while the USDA provides guidelines, each lender may have slightly different requirements or procedures. Working with a lender who has experience with USDA Loans can make the process smoother and more efficient.

USDA loans vs Conventional Loans

USDA Loans, backed by the United States Department of Agriculture, are designed to promote homeownership in rural areas.

  • Down Payment: Like VA loans, USDA loans can offer 0% down payment options, compared to the 3% minimum on Conventional Loans.
  • Location Requirements: USDA loans are restricted to rural areas as defined by the USDA, whereas Conventional Loans have no location restrictions.
  • Income Limits: USDA loans come with income limits based on the median incomes in the area where you’re buying. Conventional Loans do not have income limits.
  • Debt to Income Limits: USDA loans have a much stricter debt-to-income requirement than conventional loans. The maximum debt to income for USDA loans is 29% housing and 41% back-end ratio. This means that the housing payment cannot exceed more than 29% of the gross monthly income and the overall monthly liabilities may not exceed more than 41% of the gross income.

Frequently asked questions about USDA loans

What is a USDA Loan?

A USDA Loan is a zero-down mortgage for low-to-moderate income families living in rural and suburban areas. It is backed by the United States Department of Agriculture and is designed to promote homeownership in areas that are economically challenged.

Who qualifies for a USDA Loan?

To qualify for a USDA Loan, you must meet income eligibility, be a U.S. citizen or qualified non-citizen, plan to occupy the home as your primary residence, have a dependable income, and purchase a property in a USDA-eligible area.

Are USDA Loans only for first-time homebuyers?

No, USDA Loans are not exclusively for first-time homebuyers. However, if you currently own a home, you must be unable to obtain affordable credit elsewhere and have an income that is at or below the low-income limit for the area where you live.

How can I find out if a property is eligible for a USDA Loan?

You can visit the USDA’s website and use their online tool to check the eligibility of a specific property. Remember, a property must be located in a USDA-designated rural or suburban area to qualify.

Can I use a USDA Loan to buy a mobile home?

Yes, USDA Loans can be used to buy new manufactured homes as well as certain types of existing manufactured homes. However, the home must meet specific USDA Manufactured Home Requirements.

Can I get a USDA Loan with bad credit?

The USDA does not set a minimum credit score requirement, but many lenders require a score of at least 640. If your score is lower, some lenders may still work with you if you have a steady income and a good payment history.

What are the interest rates for USDA Loans?

Interest rates for USDA Loans are typically at or below market rates. Exact rates can vary based on your credit score, down payment, and the lender you choose

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