Loans from the United States Department of Agriculture are a sweet deal—offering 0% down, low-interest-rate mortgages in rural and suburban areas. Because the purpose of these loans is to help low- and moderate-income buyers afford a home, not everyone is eligible. To take advantage of this specialized loan type, applicants must meet the USDA’s qualifications.
The main criteria boil down to income, although the income restrictions are more lenient than many homebuyers realize. As a result, far more people qualify for USDA loans than ever take advantage of them. Don’t be in that group: This is a fantastic option for those who are eligible. Here’s how to determine if you qualify for a USDA loan.
USDA direct vs. guaranteed loans: What’s the difference?
Before diving in, it’s important to understand there are two types of USDA loans: direct and guaranteed.
- Direct loans are for very low-income applicants and are funded and administered by the USDA directly.
- Guaranteed loans are for homebuyers with more moderate incomes. In this case, borrowers are financed by lenders, but the loans are guaranteed by the USDA. This means the USDA is on the hook to pay the loan in case the borrower can’t, which enables lenders to offer these loans without shouldering too much risk.
Both direct and guaranteed loans share many of the same general requirements. However, there are some important differences to know—and not just on the income front. With that distinction in mind, here’s what it takes to qualify for either type of USDA loan.
Qualifications for USDA loans
To apply for a USDA loan, first and foremost, any property being considered for purchase must be within the boundaries of what the USDA deems an eligible rural or suburban area. If that requirement is satisfied, the USDA will check an applicant’s personal qualifications.
At the most basic level, everyone applying for a USDA loan must meet the following criteria:
- Meets income eligibility limits (which are detailed more below) and can prove stable income over time
- Can prove creditworthiness (Though there is technically no minimum credit score requirement, 640 is generally considered the bottom threshold.)
- Is a U.S. citizen or a qualifying noncitizen, such as a permanent legal resident or qualified alien
- Agrees to personally occupy the home as a primary residence
The USDA and USDA-approved lenders also typically will look at an applicant’s debt-to-income ratio, which compares an applicant’s monthly income with their monthly debts. This should ideally be lower than 43%.
USDA direct loan applicants who meet all of the above guidelines must also satisfy an additional layer of qualification: They must prove they are currently without decent, safe, and sanitary housing and that they are unable to obtain a loan elsewhere, with terms and conditions that they would reasonably be expected to meet. This issue could commonly crop up in extremely remote areas, where loans are hard to get and available lenders are limited.
A closer look at income limits for USDA loans
When applying for most mortgages, many people assume, “The more money I make, the better!” While this is true for most mortgages, it doesn’t work that way for USDA loans.
Instead, there are actually income limits with minimum and maximum thresholds. If this seems unusual, it’s important to remember these USDA loan programs are intended for lower-income families who truly need the extra help.
USDA income limits depend on a variety of factors, starting with whether you’re applying for a direct or guaranteed USDA loan.
- USDA direct loans: Applicants who file directly with the USDA for a loan may generally not make more than 50 to 80% of an area’s median income.
- USDA guaranteed loans: Applicants getting a USDA-guaranteed loan through a lender generally cannot have income exceeding 115% of the area’s median.
USDA income limits vary by location, since cost of living depends widely across geographic regions. In higher-priced areas such as Santa Cruz, CA, the income limit for USDA guaranteed loans is $210,300 for 1- to 4-member households. In less expensive areas such as Albany, NY, the USDA guaranteed loan income limit for the same size family is just $103,500.
The bigger the family, the higher the USDA’s income limit goes, with an extra 8% being added per family member beyond four.
One way to determine the USDA’s income limit for your area is to check the USDA map, where you can search for eligible cities or counties and their most recent income limit values (which are typically updated yearly).
How the USDA calculates eligible income
The USDA tallies household income in ways that are subtly different from other agencies’ calculations. For one, the USDA counts income from all household adults, who are 18 or older—not just the individual or people who are hoping to buy the house.
“So, if your elderly parents live with you and they receive Social Security income, that income counts towards the filer’s maximum income—even if they are not on the mortgage,” says Mason Whitehead, a Dallas-based branch manager for Churchill Mortgage. “Or, if your boyfriend or girlfriend is going to live with you, their income will also be counted—even if they are not on the loan application.”
You will also have to count income brought in by any children if they live under your roof, even occasionally. So if your college kids come home for the summer to wait tables or babysit, any of their annual income up to $480 per individual should technically be included in your tally.
In addition to income from jobs, the USDA also will count the following toward your eligible income total:
- Disability/Social Security payments
- Pension/retirement income
- Unemployment compensation
- Military and self-employment income
- Alimony/child support
- Rental income
And while it might not seem fair, it is also important to note that your total household income for USDA eligibility purposes could be different from the income amount a lender might use to qualify you for the loan.
For instance, the Social Security benefits of an elderly parent who lives with you, as Whitehead mentions above, might be recorded on your USDA loan application but not counted on your lender application—even if you’re applying through that lender for a USDA-guaranteed loan.
How a loan officer can help
If all of the above numbers make your head swim, don’t worry. A loan officer can help you figure out whether you qualify for a USDA loan. This is true whether you’re working with a lender to get a USDA-guaranteed loan or with your local Rural Development office to see if you qualify for a USDA direct loan. You can also determine your loan eligibility with the Realtor.com® Housing for Everyone guide.
