What are USDA home loans and am I eligible for one?

A USDA home loan is a no-down-payment mortgage for low- and moderate-income homebuyers in largely rural areas. USDA loans are part of a national program created by the U.S. Department of Agriculture to help create loans for first-time homebuyers or people who don't meet conventional mortgage requirements.

The benefits of a USDA mortgage include no down payment and looser credit requirements. Some drawbacks are that the property must be located in a USDA-approved area and borrowers cannot exceed income limits.

Here we'll cover the basics of USDA loans, including:

• USDA loan programs
• Properties that qualify for USDA loans
• USDA loan eligibility requirements
• USDA loan fees
• USDA loan income conditions
• USDA loan pros and cons
• USDA vs. FHA loans

Different USDA loan programs

USDA guaranteed - The USDA guaranteed home loan program (officially known as Section 502 Guaranteed) allows approved mortgage lenders to provide 30-year fixed-rate USDA loans to borrowers within certain income thresholds in specific USDA-eligible locations
USDA direct - Also known as Section 502 Direct, this program offers low-rate home loans to individuals in need of adequate housing. Like the guaranteed program, borrowers have to meet certain eligibility criteria to qualify.
USDA repair - The USDA repair loan program (Section 504 Home Repair) is similar to the direct program in that it caters to low-income individuals, but different in that it provides loans up to $20,000 to help improve or repair a home. There are also grants available to very low-income elderly homeowners to help remove hazards at home. These are capped at $7,500.

What type of property is eligible for a USDA loan?

Homes purchased with USDA loans must be located in eligible rural areas. The USDA defines these areas as "open country or any town, village, city, or place, including the immediate adjacent densely settled area, which is not part of or associated with an urban area."

The population requirements differ depending on the characteristics of the property, but the maximum population limit for any USDA loan is 35,000. Even if you're buying in a town that has a lower population than that, you won't qualify for a USDA mortgage if the area is within a metropolitan statistical area (MSA). It also must be in an area with "a serious lack of mortgage credit for lower and moderate-income families," according to the USDA website.

The easiest way to find out if a home is in a USDA-eligible area is to check the USDA website here.

What are the eligibility requirements for a USDA loan?

The USDA loan program, like any other mortgage, has certain eligibility requirements you must meet. If you tick the following boxes, then you should be eligible for a USDA loan, if you're buying the right kind of property:

• You're a U.S. citizen or a permanent resident with a Green Card
• Ability to prove creditworthiness (typically a minimum credit score of 640)
• The home would be your primary residence
• You meet income requirements (see below)
• You're in good standing with all federal programs
• You can provide history or proof of on-time payments for bills such as rent or car loans
• The property is located in an eligible area

What are USDA loan fees in 2022?

USDA mortgages come with two fees that are specific to the program: an upfront guarantee fee and an annual fee. The upfront guarantee fee this fiscal year is 1 percent of the loan amount. This fee can often be rolled into the mortgage instead of paying it out of pocket. The annual fee is 0.35 percent of the loan amount. So, a $100,000 mortgage would have a $1,000 one-time payment and a $350 per year ongoing payment for the life of the loan.

Both of these fees are charged to the lender who then, usually, passes the cost on to the borrower. These fees keep USDA loans subsidy-neutral, which means that any losses incurred by the program are paid for by these fees instead of taxpayer dollars. Depending on the needs of the program, the fees can change annually.

Other USDA mortgage costs might include:

• Origination fees
• Loan application fee
• Title insurance
• Processing or underwriting fees
• Credit report and notary fees
• Appraisal
• Discount points (if you choose to purchase these)

What are the income requirements for a USDA loan?

The USDA loan program is geared toward low- and moderate-income homebuyers. For this reason, applicants can't earn more than certain income limits, which vary by metro area and family size. In more expensive areas, the income ceiling is higher.

The annual income limit for a one- to four-person household in most eligible counties is $90,300, and $119,200 for five- to eight-member households. The USDA sets limits at or below 115 percent of the median household income in each region, and updates them annually.

It's important to check the maximum income limits for your household size and where you live to get the most accurate data.

Pros and cons of USDA loans

The benefits of a USDA home loan include less stringent credit score guidelines and no down payment requirement. There is also no formal loan limit, unlike FHA loans. This can be a great program for homebuyers on a budget who are flexible about where they live. The cons mostly have to do with restrictions, like those on where you can buy or how much your family can make.

Pros

• No down payment required
• Lenient credit score requirements
• Seller can pay the closing costs
• Available for both purchasing property and refinancing
• Often come with low, fixed interest rates

Cons

• Strict guidelines around where property is located
• Must use home for primary residence
• Limited income requirements
• Upfront and annual fees

USDA vs. FHA loans

Like USDA loans, FHA loans are also government-insured and provide options to individuals who might not qualify for conventional mortgage products. Here's how they compare and differ:

Key similarities

• Competitive interest rates
• Mortgage insurance required
• Appraisal required

Key differences

• USDA loans usually require a minimum credit score of 640 to avoid a manual underwrite. You could qualify for an FHA loan with a 580 score (or 500 with a bigger down payment).
• USDA loans can be secured with no money down; you'll need at least 3.5 percent down to get an FHA loan (or 10 percent if your credit score is between 500 and 579).
• USDA loans don't have loan limits, but FHA loans are capped at $420,680 for single-family homes (select markets have limits up to $970,800).
• USDA loans have a maximum debt-to-income (DTI) ratio of 50 percent; for an FHA loan, this figure can vary.

Which is better?

Both USDA and FHA loans offer perks to borrowers who don't qualify for a conventional mortgage. Which is best can depend on the home's location, your income, credit score and debt load.