If you’re looking to buy a property, you’re considering different types of loan options. One program that many families aren’t aware of is the USDA mortgage loans. It’s a great choice for those living outside of urban areas who can’t afford a large down payment. Let’s find out what a USDA loan is, who can get it, and what the income limits are.
What Is a USDA Loan?
A USDA loan is backed by the U.S. Department of Agriculture (USDA) but is offered through private lenders. The goal of the USDA loan program is to encourage people to buy homes in rural areas of the country. The best part? There’s no down payment required, which can be beneficial if you’re finding it difficult to save up for a down payment.
With no down payment, USDA loans offer low interest rates and flexible loan requirements; therefore, they’re more likely to be accessible to a wider range of people. However, there are a few rules you need to follow to qualify.
USDA Loan Eligibility Requirements
You must meet some basic requirements to qualify for a USDA loan. Let’s go over those now.
01. U.S. Citizenship or Permanent Residency
You must be a U.S. citizen or legal permanent resident to apply for a USDA loan. If you were born in the United States, you only need to provide your birth certificate. If you’re a naturalized citizen, you will need a certificate of naturalization. If you’re a legal permanent resident, you are still eligible to apply for a USDA loan, but you will need to provide your green card (permanent resident card) and social security number.
02. Dependable Income for the Past Two Years
Lenders want to see that you’ve had a steady income for at least two years. This doesn’t mean you can’t change jobs, but you need to show you’ve had a stable income without gaps. A steady paycheck reassures lenders that you’ll be able to make your mortgage payments without trouble.
You can prove your income with pay stubs, W-2 forms, bank statements, or tax returns. If you’ve been consistently employed for two years or more, you’re more likely to be approved.
03. No Late Payments or Collections for 12 Months
Lenders will review your credit report to ensure you’ve paid your bills on time. To be eligible for a USDA loan, a borrower must have no late payments or collections on their credit history for at least 12 months prior to applying for the loan. If you’ve struggled with making payments in the past, you might need to wait a bit longer before applying.
04. Your Debt-to-Income Ratio Must Be in Check
Even if you earn a steady income, lenders still consider how much debt you currently have. They measure this by the “debt-to-income ratio.” In general, your monthly loan payment should not exceed 41% of your gross monthly income. Your mortgage payment should also not exceed 29% of your gross income. However, if the debt is too high, it can be difficult to get approved.
05. The Property Must Be in a Rural Area
The USDA loan scheme is designed to help people buy homes in rural areas. This means that the home you are interested in must be in an area that the USDA considers “rural.” You can use the USDA website to see if a property qualifies by entering its address.
06. Income Limits Based on Area
A unique feature of USDA loans is that your household income can’t exceed 115% of the median income in the area where you’re buying a home. This is due to the fact that USDA loans are intended to help moderate/low-income people become homeowners. However, income limits vary depending on where you live and your household size. We’ll explain more about how income limits work in the next section.
07. Credit Score
There is no minimum credit score required by the USDA, but most lenders prefer borrowers to have a score of at least 640. If your score is lower than that, you may still qualify; however, your loan application may require a more detailed review, which may take a little longer to approve.
How Income Limits for USDA Loans Work
One of the trickiest parts about USDA loans is determining whether your household income complies with the program limits. In general, your income can’t be more than 115% of the median income in the area where you’re buying. Let’s break that down further.
01. Income Limits Vary by Location
Income limits are set based on the median income of the area where you’re looking to buy a home. These limits can vary from county to county, as the cost of living can differ depending on your location. For example, in many U.S. counties, the income limit is $82,700 for families of one to four people and $109,150 for families of five or more. However, in some high-cost locations, such as certain parts of California, the limits are higher.
02. Household Size Affects Income Limits
The number of people living in your household is an important factor in measuring your income limit. Larger families tend to have higher limits because they often need more income to support everyone. For example, For example, a family of five will have a higher income limit than a family of four.
03. Exceptions to Income
There are some types of income that don’t count toward the USDA’s income limit. For example:
- Income earned by anyone in your household under the age of 18.
- Full-time adult student income of more than $480.
- Income from live-in aides like a nurse.
- Tax credits and lump sum payments such as inheritance and life insurance benefits.
These exclusions can help families in unique situations meet the criteria even if family income appears high on the first look.
Income for Self-Employed or 1099 Earners
If you are self-employed or earn money as a 1099 contractor, figuring out your USDA loan eligibility can be a bit more complicated. Lenders will consider your gross income, which includes salary, bonuses, tips, commissions, and other money you earn from work. You must also submit tax returns because lenders will average your income over the past two years to determine if you qualify.
However, it should be noted that only current income is used to calculate the loan, so future income or increases are not considered during the eligibility process.
USDA Income Limits Across Different States
In some areas, USDA income limits can be higher due to the cost of living. For instance, in regions with higher housing prices, the income limit for a family of one to four people may be significantly higher compared to areas with lower living costs. Similarly, larger families often have higher income limits to account for the additional financial needs.
The USDA provides an online tool where you can check the specific income limits for the county you’re interested in. These limits are adjusted based on both the local cost of living and the size of your household, ensuring the program supports families who need it most in different parts of the country.
Final Thoughts
USDA loans are a great option if you want to buy a home in a rural area and don’t have much to save for a down payment. The key requirements to qualify are a stable income, a good credit history, and living within the income limits of your area. While “income limits” may seem complicated, especially for the self-employed, they are actually designed to help middle-income families buy a home without putting them in financial difficulty.
If you believe a USDA loan is right for you, the next logical step is to check the eligibility for your area and schedule an appointment with a professional lender who can guide you through the process. With the right information and preparation, buying your new home can be a smooth and exciting journey.