10 USDA Loan Facts Every Borrower Should Know
USDA loans are best known for offering eligible borrowers a path to homeownership with no down payment. But some of the program's less obvious rules can have just as much impact on whether a borrower or property qualifies.
From where you can buy to who can be on your loan, here are 10 USDA loan facts worth knowing, and USDA loan myths worth setting aside, before you apply.
One of the most common USDA loan myths is that these loans are only for farmland or remote communities. To qualify, the home must be located in a qualified rural area, but many people are shocked to learn how the USDA defines "rural."
Generally, their guidelines include any areas with a population of fewer than 35,000. According to many sources, an estimated 97% of the U.S. meets the rural area requirements. So “rural” doesn't necessarily mean farmland or a remote community. Some small towns and communities outside major metropolitan areas may also qualify.
USDA determines property eligibility based on program requirements, including population and location criteria. Instead of assuming a home is or isn't eligible based on how the area looks, check the address.
Check the USDA Loan Property Eligibility Map to see if a property is eligible.
USDA home loans are intended for properties you'll use as your primary residence.
That means you generally can't use a USDA purchase loan to finance a vacation home, second home, or investment property you don't intend to occupy.
If you already own a home, you're not automatically ineligible for USDA financing, but additional requirements may apply if you are looking to get a second USDA loan.
USDA financing isn't limited to traditional single-family homes on large plots of land.
Depending on the property and applicable program requirements, eligible property types may include:
The property itself must still meet USDA eligibility and appraisal requirements, so the property type alone doesn't guarantee that a particular home will qualify.
Unlike many mortgage programs, USDA loans have household income limits.
Eligibility is based on household income, which can include income from certain household members who aren't borrowers on the mortgage. Applicable deductions may also affect the income USDA uses to determine program eligibility.
Income limits vary by location and household size, so there isn't one income cutoff that applies to every borrower.
Check the current USDA income limits before assuming you qualify based on income.
“USDA loan” can refer to more than one home loan program, and two of the most important are USDA Direct and USDA Guaranteed Loans.
A USDA Direct Loan is offered through USDA Rural Development and is intended for eligible low- and very low-income applicants.
A USDA Guaranteed Loan is made by an approved private lender and backed by the USDA. This is the program borrowers commonly encounter when working with mortgage lenders.
The programs have different income requirements, qualification standards, and application processes.
A past bankruptcy, foreclosure, or short sale doesn't necessarily prevent you from qualifying for USDA financing in the future.
However, the circumstances, timing, and type of credit event can affect underwriting and eligibility. Rather than assuming a single waiting period applies to every borrower, ask a USDA lender how your specific credit history will be evaluated.
USDA loans don't require a down payment for eligible borrowers, but buyers still incur costs associated with purchasing and closing on a home like any other loan type.
Depending on the transaction and applicable requirements, eligible gift funds and seller contributions may help cover certain expenses.
The amount and treatment of these funds depend on USDA and lender requirements, so confirm what's permitted with your lender before relying on outside funds to complete the purchase.
Having a USDA mortgage doesn't mean you're required to keep the home for the full term of the loan.
You can sell the property and use the proceeds to satisfy the remaining mortgage balance and any other applicable costs.
Certain USDA loans may also be assumable if the applicable requirements are met. An assumption allows another eligible borrower to take over an existing mortgage rather than obtain an entirely new loan.
Assumption requirements can vary, so don't assume another buyer can automatically take over your mortgage or existing interest rate.
USDA occupancy requirements also affect who can help you qualify for the mortgage.
A person included as a borrower generally needs to meet applicable USDA borrower and occupancy requirements. This can make USDA financing different from mortgage programs that permit certain non-occupant borrowers.
If you're considering a USDA loan co-borrower, talk with your lender about how that person's income, credit, debts, and intended occupancy would affect the application.
USDA Guaranteed Loans don't impose a prepayment penalty simply because you pay the mortgage off ahead of schedule.
That means you can generally make additional principal payments or pay off the mortgage early without a USDA prepayment penalty.
USDA Guaranteed Purchase loans also generally use 30-year fixed-rate financing, giving borrowers a predictable principal-and-interest payment over the life of the loan.
USDA loans offer more flexibility than many borrowers realize, but they also have requirements that are easy to overlook. Many USDA loan myths stem from assumptions about income, location, or past credit events that don't reflect how the program actually works.
A property that doesn't look particularly rural may still be eligible. Household income can affect qualification even when not everyone in the household is applying for the mortgage. And a previous financial setback doesn't necessarily mean USDA financing is permanently off the table.
The important part is determining how the rules apply to your household, property, and financial situation, rather than assuming you qualify or don't qualify based on a single requirement.
Check your USDA eligibility with a USDA loan specialist today to see if you qualify for a USDA-backed mortgage.
