With so many options, finding the right financing option for your new home can feel overwhelming. While home buyers are generally familiar with conventional and FHA loans, USDA loans are a lesser-known option that offers zero down-payment options, competitive interest rates, flexible credit requirements, and more. But who is eligible for a USDA loan, and how do you qualify for one? We’ll tell you everything you need to know here.

What is a USDA Loan?

USDA loans, also known as USDA Rural Development Loans, are offered by the United States Department of Agriculture (USDA) to promote development in designated rural areas. Unlike conventional loans, backed by private institutions, the U.S. government backs USDA loans—which means they assume the risk associated with the loan. Because of this, the banks and mortgage companies that offer USDA loans can offer more flexible lending criteria.

Types of USDA Loans

There are three types of USDA loans:

1. USDA Guaranteed: These are the most common type of USDA loans offered through USDA-approved banks and mortgage companies. These loans are designed to help low to moderate-income borrowers purchase homes in designated rural areas. These loans are appealing because they offer low-interest rates, flexible credit requirements, and a zero down-payment option. Additionally, borrowers do not have to purchase private mortgage insurance and instead pay an upfront one percent guarantee fee.

2. USDA Direct: USDA direct loans are issued directly by the U.S. Department of Agriculture and intended for low- or very low-income applicants who cannot secure a conventional loan and are without safe housing. Because these loans are severely subsidized, interest rates can be as low as one percent and have loan terms of up to 38 years.

3. USDA Home Improvement Loans and Grants: The USDA also offers loans and grants for home improvements. These programs, also known as the Single Family Housing Repair Loans and Grants, assist low-income homeowners in repairing and modifying their homes. While grants do not have to be repaid, loans have low-interest rates and can be repaid over 20 years.

How Do I Qualify for a USDA Guaranteed Loan?

To qualify for a USDA-guaranteed loan, you’ll need to meet the following criteria:

1. Income: USDA loans are intended to assist those with low to moderate income status. These limits may vary by state, region, and the number of people in your household.

2. Citizenship: Borrowers must be citizens or permanent residents of the United States.

3. Credit: Typically, a minimum credit score of 640 is required to qualify for a USDA Guaranteed loan. However, alternative credit references may be considered if you do not have a traditional credit history.

4. Employment: Borrowers must demonstrate a two-year employment history. However, there are exceptions to this rule, depending on your circumstances.

5. Debt-to-Income Ratio (DTI): Lenders will also consider your DTI, which should not exceed 41 percent of your gross monthly income.

How Do I Qualify for a USDA Direct Loan?

You'll need to meet certain criteria to qualify for a USDA direct loan. Here are the key requirements: 

1. Income: To be eligible, you must fall into the USDA’s “low” or “very low” income category. Income limits vary by state, so check the specific requirements for your area.

2. Citizenship: Borrowers must be citizens or permanent residents of the United States.

3. Credit: Applicants should have a credit score of at least 640. However, if you cannot meet this requirement, you may still qualify if you have alternate credit references like a history of timely rental payments and utility bill payments.

4. Location: The property must be your primary residence and be located in a USDA-designated “rural” area.

Learn More About USDA Loans: Contact JustChoice Today

JustChoice Lending (JCL) is a socially responsible mortgage lender that matches clients with the right loan—every time. We offer competitive rates, unrivaled attention and service, and lasting partnerships. Request rates and learn more about USDA loans to determine if you qualify.