If you prefer open skies to dense urban living, then a mortgage through the U.S. Department of Agriculture (USDA) may be for you.
The USDA Rural Development program offers mortgages to low- and middle-income households looking to buy homes in rural and suburban areas. They’re considered a good deal not only for their accessibility to a particular segment of the country, but also for their affordability. “There are very few 0% down payment programs out there,” says Anthony Grech, senior mortgage loan originator at Luxury Mortgage Corp. “This is one of them.”
How Does a USDA Loan Work?
USDA-backed mortgages are typically originated by approved lenders, though the USDA does offer a direct loan option. Direct loans are intended for low- or very low-income families who don’t currently have “decent, safe and sanitary housing.” They must also meet additional requirements.
These loans typically serve rural and suburban communities with a population under 35,000. According to the USDA, 97% of the land in the United States is eligible for this type of loan. They’re intended to offer a path to homeownership to people who otherwise may not qualify for a traditional mortgage.
These loans are for owner-occupied homes and intended for people who have moderate to very low income. Guaranteed loans, which is the more common type of USDA loan, are similar to other government-backed mortgages, except your application undergoes approval by your local USDA office at the end. Unlike FHA mortgages, USDA loans don’t require a down payment.
Types of USDA Loans
There are two main types of USDA home loans. Here’s what you should know about each.
Most people go through a USDA-approved lender to get a mortgage. This is known as a guaranteed loan. Guaranteed loans are generally considered easier to qualify for because they’re geared toward low- and middle-income families, according to Grech. The eligibility requirements and underwriting processes are similar to getting a regular mortgage, but keep in mind they’re offered for only 30-year terms at a fixed rate. Eligible homes include single-family homes, condos, and manufactured homes — as long as they’re not for investment purposes.
If you’re in greater financial need, you may qualify for a loan directly through the USDA. Direct loans are intended for low- or very low-income families who don’t currently have “decent, safe and sanitary housing.” They must also have an income below local limits, meet citizenship requirements, and use the loan for a primary residence. You can find out if you’re eligible for a direct loan using this free tool on the USDA website.
There are more property requirements with the direct loan than the guaranteed loan. For example, the home must be 2,000 square feet or less and not have an in-ground swimming pool.
Do I Qualify for a USDA Loan?
To get a USDA loan, you have to meet certain requirements:
- Your income must be within 115% of the median household income limits specified for your area (find out if you’re eligible here)
- You must be a U.S. citizen or permanent resident (green card holder)
- You will likely need a credit score 640 or above
- Debt obligations should not account for more than 41% of your pre-tax income
- The home must be your primary residence and not a vacation home or investment property
- The home must be in an eligible rural area
There are additional requirements for a USDA direct loan:
- You must meet stricter income requirements (find out if you’re eligible)
- You must be without “decent, safe, and sanitary housing”
- You aren’t able to get a mortgage (or one with “reasonable” terms) through traditional means
- You can’t be suspended from participation in other federal programs
To make your life easier during the application and underwriting process, collect all the documents you need beforehand: W-2s, paystubs, citizenship documents, bank statements, Social Security card, and driver’s license, or some other form of ID.
There are no credit requirements, except a demonstrated “willingness and ability to handle and manage debt.” Most lenders will require a 640 credit score, though those requirements will vary depending on other factors, such as your income and history paying down debt. Compared to conventional mortgages, “the credit standards are more flexible,” says Cynthia Meyer, CFP, real estate investor, and founder of fiduciary firm, Real Life Planning.
How much money you have saved also matters, even if you qualify as low income. “If you can put 20% down, you typically won’t be able to use this mortgage option,” says D. Shane Whitteker, chief broker at Principle Home Mortgage.
What Are the Rates and Terms for a USDA Loan?
Mortgage interest rates are low right now across the industry. Government-backed loans, such as USDA mortgages, are typically lower than conventional loans. “Rates can be a half-point lower than a comparable conventional mortgage rate,” says Dan Green, founder and CEO of Homebuyer, a mortgage lender for first-time homeowners. “Every homebuyer in a USDA-eligible area should at least apply for a USDA mortgage.”
Those with poor or fair credit may see greater benefit, as USDA mortgages are intended to bring more people into homeownership and “those rates aren’t as driven by credit score as conventional loans,” Grech says.
As for terms, USDA guaranteed loans are offered for only 30-year terms at fixed rates. Direct loans have payback periods of up to 33 years, with a 38 year-option available to low-income applicants who can’t afford a 33-year term. Interest rates for a direct loan are fixed and can be as low as 1% when factoring in payment assistance.
How Do I Apply for a USDA Loan?
The process for getting a USDA loan will differ depending on whether you’re getting a guaranteed or direct loan. Since most USDA borrowers have guaranteed loans, we’ll offer directions for that process here. If you have low income and are considering a loan directly through the USDA, we recommend checking your eligibility and contacting your local USDA office, which will have an application available to you.
1. Determine your eligibility
Before you start applying, figure out if you meet the requirements for income, citizenship, debt, and assets. There’s no hard-and-fast rule issued by the USDA on credit scores, but if your credit score is 640 or higher, you’ll have a better chance at qualifying. If it’s lower, look into ways of repairing your credit to increase your chances of getting a mortgage.
2. Find a USDA-approved lender
Next, you’ll want to research and review terms available from USDA-approved lenders. Many lenders offer USDA loans, but they tend to be rare compared to the more popular FHA and VA loans. Make sure your loan officer is educated on USDA loans and knows what the process is like. Mortgage pre-approval can help expedite the homebuying process — just keep in mind there may be overlays (additional requirements) from lenders on top of what’s mandated by the USDA.
3. Shop around for a USDA-approved home
This is the fun part: going on home tours and scrolling through Zillow. Whatever home you’re seeking should be in an approved rural or suburban area. Otherwise, you won’t be eligible for the USDA loan. Additionally, you should prepare to live in the home you purchase, since vacation homes and investment properties are not allowed.
Once you’ve put in an offer and been approved, you’ll start the underwriting process. USDA loans take longer to underwrite (often up to 30 days longer), so talk to your loan officer about the expected timeline. “USDA mortgage applications are paperwork-heavy,” says Green. “You don’t want long approval times to jeopardize your closing date.”
4. Get approved by the local USDA office
There is one more step in the USDA loan process after the lender signs off. “Once the lender approves it, it has to go to the local USDA office for a stamp of approval,” Grech says. This extra approval is why USDA mortgages tend to take longer. The USDA will either manually or automatically underwrite your application, taking into account your income, credit score, experience with debt, and other factors. If your credit score is under 640, it will be manually reviewed, which can take longer but isn’t disqualifying.
Once you’re approved by the USDA, you can begin the closing process, where you’ll sign paperwork, pay your closing costs, and get the keys to your new home.
Lisa Bernardi contributed reporting for this article.