United States Department of Agriculture (USDA) loans remain somewhat of a worst-kept secret.

This is unfortunate seeing as these powerful lending tools offer a bundle of perks, including zero down-payment options, lower credit score requirements, and more lenient income guidelines.

We’d like to highlight the benefits of this underutilized loan as well as its limitations, qualification requirements, and more.

Why USDA Loans Are Underutilized

Due to misinformation, USDA loans are often overshadowed by more well-known mortgage options. Some believe USDAs are only available to low-income borrowers willing to live in highly remote areas. Others avoid USDA loans because they have heard these loans have strict eligibility requirements or take longer to process than other loan programs. We'd like to set the record straight.

What Are USDA Loans?

USDA loans are backed by the United States Department of Agriculture, which means that if the borrower defaults on the loan, the USDA will kick in to cover a portion of the lender’s losses. This added layer of protection enables lenders to offer more favorable terms to borrowers while relaxing income restrictions and down payment requirements.

USDA Benefits

Zero Down Payment Options

Unlike conventional and FHA loans, USDA loans offer home buyers 100% financing. That means no downpayment is required. The best part? Both first-time and repeat buyers are eligible for this program.

Lower Interest Rates

Because the federal government backs USDA loans, lenders can offer more competitive interest rates. In general, those rates are lower than conventional lending rates.

Lower Credit Score Requirements

Lenders typically prefer a credit score of at least 620. The good news is the USDA does not have a minimum credit score requirement. That means borrowers with lower scores may still qualify if they have steady employment histories, low debt-to-income ratios, sufficient savings, and a favorable record of debt repayment.

Flexible Income Requirements

USDA loans are designed for low and moderate-income borrowers. The USDA considers the borrower’s adjusted annual income (total income of household adults) to assess eligibility. That income must not exceed the limit for the property region and state.

In Kentucky, that income limit is set at around $110,000 for a family of one to four people and $153,000 for a family of five or more.

USDA Limitations

While USDA loans offer numerous benefits, borrowers (and their property) must meet the following qualifications:

Property Location

USDA loans are only available for properties located in a designated rural area. While the definition of “rural” is quite fluid and even includes some suburban areas, this requirement still limits the pool of available homes.

Primary Residence Only

While borrowers can use a USDA loan to finance single-family homes, condos, and manufactured homes, that property must be their primary residence. In other words, that home cannot be used for investment purposes.

Income Limitations

USDA loans have income limits that vary by location and household size. If a borrower's income exceeds these limits, they may not be eligible for a USDA loan. This can be a drawback for borrowers in higher-income brackets who would otherwise benefit from the program's favorable terms.

Longer Underwriting Times

In simple terms, “underwriting” happens when a lender reviews a loan application to assess risk—estimating the likelihood of a borrower repaying the loan. Processing times may vary. However, USDA loans can take between 30-60 days to close. Conventional loans generally take between 30-45 days to close.

Your Homeownership Path Begins Here

Whether you are a first-time homebuyer or looking to upgrade to a larger home, our team is here to make your homeownership dreams come true. We're USDA loan experts who simplify complex application processes, helping you navigate eligibility requirements, paperwork, and all the steps involved in securing your loan. Contact us today!