Do You Qualify For A USDA Home Loan? Here Are The Eligibility Requirements For 2022
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*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.
Not a fan of the big city? Do you want a little more space to spread out and survey all that lies in front of you? The U.S. Department of Agriculture (USDA) has a home loan option that may well appeal to you.
Although Rocket Mortgage doesn’t offer USDA loans at this time, we want you to be well versed in all your home loan options. In this article, we’ll touch on major USDA eligibility requirements as well as the benefits and drawbacks of the program for you to decide whether it’s right for you.
What Is A USDA Loan?
A USDA loan (also known as a Rural Development loan) is a type of government-insured mortgage that is guaranteed by the U.S. Department of Agriculture (USDA) in order to support rural housing markets. Because they don’t require a down payment, the USDA loan program provides an affordable borrowing option for home buyers looking to purchase a property in a rural area.
USDA Eligibility Requirements For 2022
To qualify for a USDA loan, applicants must be U.S. citizens or legal permanent residents.
Beyond that, eligibility for a USDA loan depends on several factors, including geographic location, as well as your income, debt and credit score.
Here’s what you need to know.
USDA Geographic Eligibility
USDA loans were designed to help develop affordable housing in rural areas. USDA loans are not available in or around large, populated areas.
Fortunately, most of the country qualifies to get a mortgage under this loan program. You can check area eligibility by putting an address into the USDA eligibility map. If you’re looking to buy in an area that’s not marked by orange, you may be eligible for a USDA loan.
USDA Single-Family Home Requirement
In order to get a USDA loan for a house, not only does the home need to be in an eligible rural area, but it also needs to be a single-family primary residence. This means that you must live there most of the year. For more, check out our guide to primary residences and other property classifications.
USDA Income Limits
To qualify for a USDA loan, you and all the adults in your household can’t make more than 115% of the greater of the U.S. median family income or the median income in your area for a family of your size.
Household income is a meaningful distinction because it includes the income of those adults living with you without regard to whether they’re on the loan. The calculation is based on gross income.
Fortunately, you can exclude the cost of childcare under many circumstances. You can also deduct any expenses related to disability that exceed 3% of your annual income. It’s also important to note that if any adults in the home are full-time students, only a certain portion of their income is counted for qualification purposes.
You can use this income calculator from the USDA to help you get an idea of whether you qualify. They also have a listing of income limits for individual counties broken down by family size. To get an idea of how this works, we’ve included specific metro areas in the table below. The USDA has different income limits for its direct loans, but the ones that we’ll use are for the mortgages done by lenders and guaranteed by the USDA.
2022 USDA Income Limits For 1 – 4-Person Household
2022 USDA Income Limits For 5 – 8-Person Household
Gilpin County, Colorado
Grand Rapids-Wyoming, Michigan
USDA Debt-To-Income (DTI) Limits
Your debt-to-income ratio (DTI) is a comparison of your monthly debt payments against your overall monthly income. For the best chance of qualifying, your debt-to-income ratio shouldn’t exceed 50%. To increase your likelihood of approval, you should keep your DTI at 45% or less.
USDA Credit Requirements
The USDA doesn't set a specific minimum credit score to qualify for a loan. That said, lenders may set their own requirements in terms of the credit score necessary to qualify for a mortgage. Additionally, you may find that you need a 640 median FICO® Score to be qualified through the automated underwriting system used by the USDA.
Pros And Cons Of USDA Loans
In many ways, USDA loans function similarly to conventional loans. For example, with both types of loans, borrowers will pay the same closing costs and adhere to the same repayment schedules.
There are, however, some unique advantages and disadvantages to USDA loans. Let’s look at those.
Benefits Of USDA Home Loans
USDA loans have many advantages including the fact that they feature no required down payment as opposed to the 3% – 5% typically required for a conventional loan. Additionally, the guarantee fees are lower than the mortgage insurance costs associated with FHA loans. Here’s a closer look at the benefits.
No Down Payment Required
With the USDA loan, there’s usually no down payment required. This is a striking difference from most conventional loans, and it makes this loan program a particularly attractive option for low- to moderate-income home buyers.
Competitive Interest Rates
Relative to other mortgage options, USDA loans offer competitive interest rates. That said, in order to get the best rates for any home loan, it pays to have a strong credit score and minimal recurring debts.
No Prepayment Penalty
A prepayment penalty is a fee charged by some lenders when you pay off your home loan within a period of years specified in your mortgage contract. The reasoning is that mortgage investors want to be able to guarantee receiving a certain amount of interest. Lenders offering mortgages guaranteed by the USDA aren’t allowed to charge prepayment penalties.
Finance Closing Costs
The USDA has lenient guidelines that allow you to finance any closing costs customary for your area and the type of loan you’re getting into your new USDA mortgage. This contrasts with other loans where the costs that can be built into the loan balance are more limited.
Drawbacks Of USDA Home Loans
There are many benefits to USDA loans, but they don't come without downsides. Let’s take a quick look at these.
Smaller Lender Network
Many private lenders – including Rocket Mortgage – do not offer USDA loans. The USDA maintains its own lender network.
Geographic Eligibility Restrictions
USDA mortgages are made for the purpose of development in rural areas of the country. As a result of this, you must be in a rural area or one on the outskirts of suburbia. While most of the country falls in an eligible area, you wouldn't be able to get a loan through the USDA in a major metropolitan area. Check the USDA eligibility map for more details.
In order to get a USDA loan, members of your household can't make more than 115% of the greater of the U.S. median family income or the median family income in your area. This contrasts with some other loan programs with income limits where only the income of the applicants is considered. On the other hand, these limits are higher than limits on some other loans.
Required Guarantee Fees
Most loans that allow borrowers to make low (or no) down payments require a form of mortgage insurance. This is meant to protect the lenders and/or investors backing the loan.
The USDA version of this insurance is called a guarantee fee. USDA loans have upfront guarantee fees of 1% of the loan amount, after which the annual guarantee fee is 0.35% of the average unpaid principal balance each fiscal year.
While these fees are reminiscent of the mortgage insurance required an FHA loans, one benefit is that they’re lower in many cases.
Single-Family Homes Only
If you're getting a USDA loan, you can't use it to purchase a multifamily property. Additionally, it's meant for primary residences. If you're getting a vacation home or investment property, you'll need a conventional loan.
USDA Appraisal Requirements
USDA appraisals differ from standard appraisals in that the appraiser must check to make sure that the property meets USDA guidelines, and then determine its fair market value.
Minimum Property Requirements (MPRs)
There shouldn’t be too many surprises when it comes to what USDA appraisers are looking for when they examine the property. However, it’s helpful to understand the guidelines they’ll use, and the reasons behind those rules.
The appraiser will use the following guidelines aim to make sure the home will be legal, safe and livable:
- Structural integrity: The foundation and roof of the home must be in an immediately livable condition.
- Wiring, plumbing, heating and cooling: The electrical system must be sound, with no exposed or fraying wires, and it must be able to support standard appliances such as a refrigerator. Plumbing must be functional and include waste removal. Heating and cooling systems must be functional.
- Access to home: The home must be accessible from a road that will function in all seasons.
- Location of well and septic system: A well must be at least 100 feet from the septic field.
- Compliance with all zoning and building codes: This includes state and local guidelines. For manufactured housing, these standards would be set by the Department of Housing and Urban Development.
Home, Property And Land Disqualifications
As part of the home appraisal, the appraiser will use the following guidelines to make sure that the property is a good fit with the philosophy and aims of the USDA loan:
- Restricting location: The home must be in a qualifying rural area.
- Income-generating buildings: A property with an income-generating building, such as a barn or commercial greenhouse, will not qualify.
USDA Home Inspections
Unlike an appraisal, a home inspection is not required. It is, however, often a good idea. Even though USDA appraisals are thorough, inspections will reveal a range of issues that are not covered.
The Bottom Line
USDA loans can be a great option for those looking to avoid a down payment when buying a home in a qualifying rural area. In addition to restrictions around geographic eligibility, there are limits around family income associated with this option.
On the plus side, usually there’s no down payment required and closing costs can be built into the loan. On the other hand, the property must be a single-family primary residence and there are required guarantee fees that function identically to mortgage insurance.
Although Rocket Mortgage doesn’t offer USDA loans at this time, we encourage you to learn about FHA loans if you’re looking for an option with a low down payment and accessible credit requirements. You can apply online or discuss this and other mortgage options with one of our Home Loan Experts at (833) 230-4553.