USDA Home Loans: Who Qualifies and How They Work

When people hear “USDA loan,” they often picture farmland and tractors. In reality, this home loan program is designed to help everyday buyers purchase homes in eligible rural and many suburban areas. If you have modest savings for a down payment and are open to living a bit outside major city centers, it could be worth a look.

What a USDA Loan Is

USDA home loans are backed by the U.S. Department of Agriculture through its rural development program. The goal is to encourage homeownership in less densely populated communities. You do not need to farm, run an agricultural business or buy land to use one. You simply need to buy an eligible home in an eligible area and meet the program’s borrower requirements.

One of the biggest attractions is that eligible borrowers may not need a down payment, which can make homeownership possible much sooner for buyers who have steady income but limited savings.

Who May Qualify

It must be your primary residence

USDA loans are for homes you will live in. They cannot be used for vacation homes or investment properties.

Income limits apply

The program is aimed at low- to moderate-income households, so there are maximum income limits. These vary by county and by household size, so a family of five may have a higher limit than a couple in the same area. When calculating eligible income, the program may count all household income, while allowing certain deductions, such as some childcare expenses or allowances for dependents.

Different types of income can count, including wages, self-employment earnings, bonuses, commissions and rental income. Your loan officer can help you figure out where your household falls. Because the limits look at the whole household, it is worth sharing every income source early so there are no surprises later in the process.

Credit and debts

Like other loans, USDA financing considers your credit history and debt-to-income ratio. Requirements can vary by lender, so ask what applies in your situation. If your credit needs some work, a loan officer can suggest steps to take before you apply.

Where You Can Buy

The property must be in an area USDA considers eligible. You might be surprised by how broad that can be. Many small towns and suburban communities qualify, not just remote countryside.

Here is how to check:

1. Visit the USDA’s online eligibility site.
2. Enter the specific property address to see if it is in an eligible area.
3. Use the income eligibility tool to estimate whether your household qualifies.
4. Confirm the results with your loan officer, since maps and limits are updated from time to time.

The home itself also needs to meet certain standards. It should be safe, structurally sound and have working systems. In some cases, eligible repair or improvement costs may be included in the loan, though this involves extra documentation and proof that the work is completed.

How USDA Compares

USDA loans include an upfront fee and an annual fee, which work somewhat like mortgage insurance. Every program has tradeoffs. Depending on your situation, you might also compare:

• VA loans: $0 down with full entitlement for eligible veterans and service members, with no monthly mortgage insurance.
• FHA loans: 3.5% down with a 580 or higher credit score, and no location restrictions.
• Conventional loans: As little as 3% down for eligible buyers, with PMI that can be removed at 80% loan-to-value.

Learn more on our USDA loan page or see how programs stack up on our loan comparison page.

Wondering whether a home you are eyeing is USDA eligible? Contact FLO Mortgage and a loan officer will help you check the property and your income in just a few steps.

This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.