USDA Home Loan Requirements

USDA Home Loan Requirements

USDA Home LoansIn this guide on USDA loans, we will cover and discuss all the USDA home loan requirements for borrowers and the type of properties that is eligible.  USDA mortgage loan programs offer a home buyer the chance to purchase a home in a rural or suburban area that is designated as a rural development area by the United States Department of Agriculture.

USDA home loan requirements offer 100% financing to qualified homebuyers in USDA-designated areas in the United States. In the following paragraphs, we will cover and discuss all the ins and outs of USDA home loan requirements for both borrowers, property, and the area that is eligible for USDA loans.

Are USDA Home Loan Requirements Hard To Get Approved?

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If a home buyer can structure their home purchase with a seller concession where the home seller will offer a seller concession towards the home buyer’s closing costs, the home buyer with a USDA loan can purchase their home with zero money out of pocket. There is no down payment on the USDA home purchase and the closing costs can be covered 100% with the seller concession from the home seller.

In the event, that the home buyer is short with the seller’s concession towards their closing costs, the home buyer can get a lender’s credit towards the closing costs of the home loan.

A lender’s credit is when the USDA mortgage lender will give a mortgage loan borrower funds to cover part or most of their home closing costs in lieu of a higher interest rate. USDA Loans are extremely popular in many parts of the country.

USDA Home Loan Requirements For Eligible Properties

To be eligible for a USDA mortgage loan, the property needs to be in a USDA-designated area and the USDA mortgage loan applicant needs to be qualified with regard to credit scores and debt-to-income ratios. USDA mortgage lending guidelines differ in a way that is different than other mortgage lending programs.

USDA Home Loan Requirements on Household Income

There is a maximum household income limit depending on the county the property is located in. If a married mortgage applicant goes on the mortgage loan by himself or herself and the spouse is not on the loan, the spouse’s income is counted as part of the household income even though the spouse is not on the mortgage note.

Other factors come into play as well as the number of dependents. Maximum front-end debt-to-income ratios are capped at 28% and the maximum back-end debt-to-income ratios are capped at 41%.

How Much Do I Need To Buy a House With a USDA Loan

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It is no secret that buying a house in the latter part of 2023 is very difficult. The federal reserve just raised interest rates for the sixth time this calendar year alone. These are the highest and sharpest rate hikes in multiple decades.

While the intention of the rate hikes is clear and precise, to combat inflation, the results are much different.  Right now, many clients struggle to come up with a down payment to purchase a house. Then you must factor in the additional closing costs. You can get up to a 6% seller concession or lender credit to cover closing costs on a home purchase with a USDA loan.

Unless you are a veteran who bravely fought for our country, you will more than likely need a down payment to purchase a home. However, there is a little-known mortgage program that does not require a down payment.

What Area Are USDA Home Loans Eligible?

USDA Home Loans are offered in rural areas and are funded by the United States Department of Agriculture. In this blog, we will discuss what a USDA mortgage is, some basic qualifications, and how to apply for a USDA loan with Gustan Cho Associates.

We want to inform our readers that the United States Department of Agriculture is more than just a food and safety organization. When you go to the grocery store, you may see things like USDA cuts of meat, or USDA-certified organic produce, but you will not see information on a USDA mortgage loan.

USDA Loans Versus Conventional Loans

USDA loans are not as popular as conventional or FHA mortgage lending but can offer you a clear path to home ownership. USDA‘s mission statement is helping families in rule areas become homeowners.

A USDA loan is a program geared for low to moderate-income families to purchase a single-family dwelling. A USDA home loan offers competitive interest rates and helps the homebuying process become more affordable for low to moderate-income individuals in designated rural areas.

The United States Department of Agriculture will directly back the mortgage in the same way the United States Department of Veteran Affairs will for a VA mortgage loan. Because of this federal government backing, mortgage lenders typically offer more competitive interest rates compared to conventional financing. The main benefit of a USDA mortgage loan is no down payment is required. Since no down payment is required, the qualifying criteria are slightly more strict compared to conventional or FHA financing.

USDA Home Loan Requirements on Eligible Properties and Areas

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USDA loans are only eligible in rurally-designated areas by the United States Department of Agriculture. The Department of Agriculture promotes USDA loans in rurally designated areas in the nation to promote homeownership for lower to moderate-income families. Only certain areas in the country are eligible for USDA mortgage loans.

As mentioned in this article, a USDA loan is only eligible in certain rule areas. The good news is, the United States Department of Agriculture mortgage department has an easy-to-use interactive eligibility map to make sure a home in question is eligible for USDA financing.

Here is a link to this map. You will simply type in the full address to see if the property in question is located within the geographically eligible area. Even if the home is in a designated area, USDA strongly recommends that you reach out directly to them to double verify. This interactive map is a great tool, but not always 100% accurate.

USDA Home Loan Requirements on Occupancy and Household Income

Residency -In order to utilize a USDA loan, you must be a legal resident of the United States, a non-citizen national, or a permanent resident alien. For more information on residency qualifications, please reach out to Gustan Cho Associates today.

Income limits – Income limits are key critical when qualifying for a USDA mortgage loan. This is why you must work with a highly skilled mortgage team who knows the ins and outs of a USDA mortgage loan such as Gustan Cho Associates.

Since USDA loans are geared toward low to moderate-income families, your mortgage lender must verify your adjusted gross income. Your adjusted gross income cannot exceed 115% of the medium income in your area median. There is an easy-to-use income eligibility tool on the USDA website. This will show you the median income in the area you are looking to purchase a home.

USDA Mortgage Underwriting Guidelines on USDA Loans

Assuming you meet the income limits, underwriting must verify you have a stable source of income to make future mortgage payments. An underwriter will want to see a clean payment history for the previous 12 months based on your credit report. While late payments are not necessarily a disqualifier for FHA mortgage loans, payment history is incredibly strict with USDA mortgage lending.

USDA Home Loan Requirements on Debt-To-Income Ratio

Many clients ask if there is debt to income requirements with USDA mortgage lending. The short answer is yes, your debt-to-income ratio is a qualifying factor for a USDA mortgage loan. The general recommendation is your debt-to-income ratio should not exceed 43% of your adjusted gross income. While it is possible to go above this number, it will all be part of the automated underwriting system to see if you qualify for a USDA mortgage loan. Gustan Cho Associates offer an easy-to-use mortgage calculator that will also help you estimate your front and back-end debt-to-income ratios.

GCAs user-friendly mortgage calculator will give you an estimate on your mortgage payment and also give you a field where you can enter other liabilities such as your credit card payments, auto loan payments, student loans, and any other debt you may have reported to your credit report.

Thousands of consumers and loan officers use the GCA mortgage calculator. The GCA mortgage calculator is used throughout the real estate industry by loan officers, realtors, and borrowers. For any questions on how to utilize our state-of-the-art mortgage calculator, please contact us at Gustan Cho Associates at 262-716-8151 today. Text us for a faster response. 

USDA Home Loan Requirements on Credit Scores

Credit score – Credit scoring can be very difficult to understand. The USDA automated underwriting system generally wants to see a credit score of 640 or higher. However, it is possible to purchase a home with a USDA mortgage loan even if your credit score is below 640. Typically, you will need to show other compensating factors such as on-time payment history, additional assets in the bank, longevity on your job, high residual income threshold, and other positive factors.

If your credit score is above 640, typically the automated underwriting system for USDA loans is going to send you an approval. While there are many factors that go into a USDA mortgage loan, a credit score is highly important. Gustan Cho Associates are always available to review your credit report in detail with you. We are experts in credit scoring and can give you pointers to raise your credit score in order to qualify for a home loan.

We have seen every credit score from the mid-400s to the mid-800s. There are many little things you can do to raise your credit score. Our team is here to offer our professional advice. While we usually do not recommend credit repair, we are always willing to give you our advice on raising your credit scores.

Perks To a USDA Home Loan

The number one perk to a USDA loan, in our opinion, is the no down payment requirement. In the economic condition, the United States is currently in, saving money is harder than ever. With inflation higher than it has been in decades, many Americans are currently burning through their savings just to make ends meet.

USDA Home Loan Requirements on Down Payment

Since a USDA loan does not require a down payment and allows the seller to pay closing costs, it is possible to purchase a home with little or even no money out of pocket. A USDA mortgage loan will allow the seller to pay up to 6% of the purchase price towards seller-paid closing costs.

While we do not require a copy of the home inspection, you want to make sure the property you are purchasing will pass a USDA appraisal. For more information on the USDA appraisal process or the difference between a home appraisal and a home inspection, please reach out to Gustan Cho Associates today.

Let’s say you find a home for $300,000, the seller can pay up to $18,000 in closing costs. It is unlikely the closing cost will be that high, so in theory, you will not need to bring any money out of pocket if you are able to negotiate seller-paid closing costs into your contract. For more information on this process, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at

Mortgage Insurance Guidelines on USDA Loans

Mortgage insurance – Technically, a USDA mortgage loan does not require mortgage insurance. However, they do have a guaranteed fee. Similar to an FHA loan, USDA mortgage loans come with an upfront and annual guarantee fee.

The upfront guarantee fee is something that is financed into your total loan amount and is always equal to 1% of your loan amount. The annual guarantee fee is added to your monthly payment.

The annual fee in the year 2022 is equal to .35% of the loan amount. For example, you have a $250,000 USDA loan, so .35% of $250,000 is $875. This $875 will be divided equally into your 12 monthly mortgage payments, so $72.92 will be collected each month to pay the annual guarantee fee.

USDA Home Appraisal

Appraisal – Similar to most mortgage programs available, USDA loans require an appraisal conducted by a third party before an underwriter may approve the loan. A USDA appraisal is slightly different from a conventional appraisal. With a conventional appraisal, the mortgage lender is looking for the value of the home and not much more. That way a lender can make their decision on how much they are able to lend you.

With a USDA mortgage loan, the lender is looking for the value of the home along with a few other items. A USDA appraiser will also confirm the condition of the home to make sure the home meets USDA standards. A USDA appraisal will verify the home is up to code and in livable condition. Items such as the HVAC system and roof will be viewed and must meet strict criteria. USDA appraisals also look for damage like broken windows and holes in the wall.

A USDA appraisal will also include a well and septic report to verify the systems are working correctly and meet USDA guidelines. Since the USDA appraisal is more in-depth compared to a conventional appraisal, it is usually in your best interest to complete a home inspection at the beginning of your home-buying process.

What Is The Mortgage Process for Getting Approved For a USDA Loan

Applying for a USDA loan with Gustan Cho Associate is easier than ever. As mentioned above, you must work with a loan officer who is familiar with this program, or the process will be a nightmare. Our team of highly skilled loan officers is up to date on all mortgage guidelines, including guidelines on USDA mortgage lending.  After reviewing your upfront qualifications with a one-on-one mortgage consultation, you will be paired with a licensed loan officer in your state. Your licensed loan officer will send you an online application link.

How Can I Qualify and Get Pre-Approved For a USDA Loan

This online application is easy to navigate and will gather the required information to start the process. This application link will ask you for details surrounding your current residence, employment for the previous two years, income and asset information, and other items based on your application. After you fill out the online application, you will be given a secure portal to upload your income and asset documentation. After your loan officer receives your full application with all the requested information as well as the documentation, they can move forward with the pre-approval process. Here is what Michelle McCue of Gustan Cho Associates said about USDA loans:

Since a USDA mortgage has a few more qualifications than your conventional or FHA mortgage programs, this process may take slightly longer. Now that you understand the basics of USDA lending and how to apply with our team, we encourage you to apply today. Since the beginning of the COVID-19 pandemic, many Americans have decided to move out of large cities and into more rural areas. A USDA loan can be a great purchasing tool to make this a reality.

We strongly encourage you to search the USDA eligibility map to make sure you are looking in a USDA-eligible area. Please keep in mind that even though a down payment is not required, you are still on the hook for closing costs unless you can have the seller pay those for you. The number one hurdle for homeownership is saving for the down payment, so a USDA loan can skip the hardest step for you.

Getting Approved With The Best Lender For a USDA Loan

Not every lender offers USDA mortgage loans and more importantly, not every loan officer knows the qualifications. Since a USDA home loan can be difficult to get to the finish line, it is important to work with a highly skilled mortgage team such as Gustan Cho Associates. We would like to add a disclaimer before we wrap up this article.

Every USDA loan is reviewed directly by the United States Department of Agriculture. After you receive a clear to close on our end, the file is sent directly to USDA for final approval. During the final approval process, there are things out of the lender’s control that may disqualify you from the mortgage loan.

Since these loans are directly endorsed and guaranteed by USDA, they have the final say. It is rare that the USDA will deny a closing, but it is a possibility. With that out of the way, we strongly encourage you to reach out directly to our team with any USDA-related questions. We are available seven days a week and work in the evenings to fit your schedule.