What is a USDA Loan? Am I Eligible for One? - NerdWallet (2024)

FAQs

What is a USDA Loan? Am I Eligible for One? - NerdWallet? ›

USDA direct loans are reserved for qualified first-time homebuyers whose earnings are no more than 80% of their area's median income. USDA loans have no down payment requirements, and they typically come with a lower interest rate than you'll find among conventional mortgages.

Along with no need for a down payment, USDA loans have another advantage: You could qualify for a modest, fixed interest rate if you have low income. Some drawbacks, though, are that the property must be located in a USDA-approved area, and borrowers cannot earn more than a certain amount.

USDA Loan Approval

The standard debt to income (DTI) ratios for the USDA home loan are 29%/41% of the gross monthly income of the applicants. The maximum DTI on a USDA loan is 34%/46% of the gross monthly income. USDA will allow these DTI ratios with compensating factors.

The property must be located in a rural area. This means the area must have a population of less than 20,000. In order to meet the income qualifications, you must make less than 15% above the average income for the area. You must also be able to demonstrate that you have stable income and employment.

What is the minimum credit score for a USDA loan? Approved USDA loan lenders typically require a minimum credit score of at least 620 to get a USDA home loan. However, the USDA doesn't have a minimum credit score, so borrowers with scores below 620 may still be eligible for a USDA-backed mortgage.

In most U.S. housing markets, the USDA loan limit for Single-Family Direct Loans is $336,500 in 2022. But if you're buying in an area with higher housing prices, loan limits may be higher. For example, in Wake County, N.C., the loan limit is $336,500. In Clark County, Wash., a homebuyer could borrow up to $478,400.

However, there are certain disadvantages to consider, such as income limits, property restrictions, occupancy requirements, USDA program fees and a potentially longer underwriting timeline.

You can use Neighbors Bank's Property Eligibility Map to check if an address meets qualifications. Credit History and Score: While USDA loans have more lenient credit requirements compared to conventional loans, a very low credit score or a history of bankruptcy, foreclosures or short sales can lead to denial.

USDA Loan Alternatives. Many people don't qualify for USDA loans because their income exceeds the 115% limit for the area where they want to purchase property. However, if you don't have the money for a large down payment, you still have options for purchasing a home.

Are USDA loan payments cheaper? ›

In many cases, interest rates for USDA loans are lower than rates for conventional loans. The government backing of USDA loans typically means that lenders can issue them with competitive interest rates.

To be eligible for a USDA home loan, your total household income cannot exceed the local USDA income limits. The current standard USDA loan income limit for 1-4 member households is $112,450, up from $110,650 in early 2024. The 2024 limit for 5-8 member households is $148,450, up from $146,050.

When calculating annual income, every adult earner in the household will be considered. Adjusted Annual Income - is calculated by subtracting qualified deductions from the annual household income. USDA qualifying income is determined by comparing adjusted annual income to the regional median income.

Yes. The USDA Rural Housing Site Loan can be used to purchase land on which you'll construct a single-family home. USDA land loans are only available to low- and moderate-income families. The maximum allowable income is 115% of the borrower's area median income (AMI).

So no, USDA loans don't require PMI; only conventional loans have PMI, and only on those loans where the borrower has less than 20% equity in their home. Other loan programs may have their own forms of mortgage insurance. On FHA loans, mortgage insurance is referred to as a mortgage insurance premium (MIP).

To qualify for a USDA loan, most lenders require a credit score of at least 640, though this number may vary depending on the lender. To qualify for an FHA loan, a credit score of at least 580 is most often required. Some lenders will allow a credit score in the 500 – 579 range if you make at least a 10% down payment.

Obviously, Bank of America is one of the largest USDA lenders in California.

Types of USDA loans

These loans often have low interest rates, no down payment, and more lenient credit requirements. The property must be in an eligible rural area, and borrowers must meet household income requirements that vary by location and household size.