The USDA home loan program

The USDA loan program is one of the best mortgage loans available for qualifying borrowers.

There’s no down payment required, and mortgage insurance fees are typically lower than for conventional or FHA loans. USDA interest rates tend to be below-market, too.

To qualify for 100% financing, home buyers and refinancing homeowners must meet standards set by the U.S. Department of Agriculture, which insures these loans.

Luckily, USDA guidelines are more lenient than many other loan types.

USDA eligibility requirements

Basic USDA loan requirements include:

• Minimum credit score — 640 with most lenders
• Clean credit history — No late payments or recent bankruptcy or foreclosure
• Income requirements — Income limits vary by area; often $91,900 for a 1-4 person household
• Employment — Borrowers need a steady income and employment history. Self-employment is eligible
• Geographic requirements — You must own a home in an eligible area
• Property requirements — Must be a single-family home you’ll use as your primary residence
• Loan type — Only a 30-year, fixed-rate mortgage is allowed

In addition, most USDA lenders want borrowers to have a debt-to-income ratio (DTI) below 41 percent.

That means your monthly debt payments (including things like credit cards, auto loans, and your future mortgage payment) shouldn’t take up more than 41% of your gross monthly income.

This rule is not set in stone, though.

USDA is flexible about its loan requirements. And lenders can sometimes approve applications that are weaker in one area (like credit score or DTI) but stronger in another (like income or down payment).

USDA’s goal is to help low- and moderate-income buyers become homeowners. So if you meet the basic criteria — or you’re close — check your eligibility with a lender.

USDA income limits

USDA’s income limit is set at 115% of your area’s median income (AMI). That means your household income can’t be more than 15% above the median income where you live.

The actual dollar amount varies by location and household size. For instance, USDA allows a higher income for households with 5-8 members than for households with 1-4 members.

And, USDA income limits are higher in areas where workers typically earn more.

Here’s just a sample to show you how USDA income eligibility can vary by location:

USDA property eligibility

Officially called the ‘rural development loan,” USDA’s mortgage program is intended to promote homeownership in underserved parts of the country.

Because of this, the United States Department of Agriculture will only guarantee loans in eligible “rural” areas.

But don’t be deterred. USDA’s definition of ‘rural’ is looser than you might expect at first.

You don’t have to buy a lot of land or work in agriculture to be USDA eligible. You just need to live in an area that’s not densely populated.

Officially, USDA defines a rural area as one that has a population under 35,000 or is “rural in character” (meaning there are some special circumstances). And that covers the vast majority of the U.S. landmass.

USDA mortgage insurance requirements

The USDA single-family housing guaranteed program is partially funded by borrowers who use USDA loans.

Via mortgage insurance premiums charged to homeowners, the government is able to keep the USDA rural development program affordable.

USDA last changed its mortgage insurance rates in October 2016. Those rates remain in effect today.

Today’s USDA mortgage insurance rates are:

• 1.00% upfront fee, based on the loan size (can be rolled into the loan balance)
• 0.35% annual fee, based on the remaining principal balance

As a real-life example of how USDA mortgage insurance works, let’s say that a home buyer in Cary, North Carolina is borrowing $200,000 to buy a home with no money down.

The buyer’s mortgage insurance costs include a $2,000 upfront mortgage insurance premium, plus a monthly $58.33 payment for mortgage insurance.

Note that the USDA upfront mortgage insurance is not required to be paid as cash. It can be added to your loan balance to reduce your funds required at closing.

Check your USDA eligibility

USDA-guaranteed loans can be used for home buying and to refinance real estate you already own (as long as it’s in an eligible area).

For those who qualify, this is often one of the best loan options available.

USDA loans are great for first-time home buyers in particular, as you don’t need any money saved up for the down payment. But remember — you’ll still have to pay for closing costs.

It could be easier than you think to qualify for a home loan via the USDA program. Check your eligibility with a USDA-approved lender today.