USDA Loans for New Homes: How to Qualify

Posted on August 10, 2022 in Mortgage FAQ's

The U.S. Department of Agriculture (USDA) Loan Program provides mortgages to qualifying rural homebuyers. Also known as the USDA Rural Development Guaranteed Housing Loan Program, it’s designed to help buyers purchase properties that are located in more isolated settings. If you think a USDA loan is for homes surrounded by pastures and farms, you couldn’t be further from the truth; and you’re in the right place! However, not all prospective buyers are eligible to receive this type of funding. Today, we’re sharing all about USDA loans for new homes. We’ll also dive into the criteria required to apply so you can determine whether or not you qualify. 

Types of USDA Loans for New Homes

There are three different types of loans offered under the USDA Loan Program. These include loan guarantees, direct loans, and home improvement loans/grants. Let’s take a look at how each one works. 

USDA Loan Guarantees

When the USDA guarantees a mortgage issued by a qualifying local lender, it’s known as a guaranteed loan. These loans work similarly to ones backed by other government agencies, including the U.S. Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA). 

With a loan guaranteed by the USDA, buyers can take advantage of lower interest rates than the ones they’d find in a conventional loan. They can even access these lower rates without applying a down payment toward the purchase of their property. 

The only drawback is that if a buyer fails to put any money down (or only puts down the bare minimum), then they will have to pay a mortgage insurance premium. 

USDA Direct Loans

The USDA offers direct loans to low-income and very-low-income mortgage applicants. Though income thresholds will vary, interest rates can be as low as 1% with subsidies. 

The agency issues direct loans to applicants that it determines have the greatest need. Usually, this means that they meet the following eligibility criteria:

  • Are without safe, decent, and sanitary housing
  • Are unable to secure a home loan from another, more traditional source
  • Have an adjusted annual income that’s at or below the low-income limit for the county they live in

Most USDA direct loans are for homes that are 2,000 square feet or fewer. Often, their total market value will fall below the loan limit in that geographical area, which varies by county. 

In expensive, higher-bracket real estate markets like Hawaii and California, applicants can receive a USDA direct loan for amounts up to $500,000 or more. However, this isn’t usually the case. Most direct loans are for much less, and in some rural parts of the country, they are only around $100,000. 

USDA Home Improvement Loans/Grants

The USDA also offers loans and financial awards to help homeowners repair or renovate their properties. Qualifying recipients can combine a USDA loan with a grant to fund their project. In all, these packages can provide up to $27,500. 

Qualification Criteria for USDA Loan Guarantees

The most common type of USDA loan is a USDA-backed mortgage guarantee. If you’re thinking about applying for this type of loan, it’s important to check and see if you qualify before you begin the application process. Despite popular belief, you do not have to be a farmer or hold any type of agricultural occupation to qualify for a loan.

Rather, loan eligibility is usually determined by two primary factors: your income and location. Here are the basic guidelines you’ll need to meet. You might be quite surprised by how many locations fall under this qualification.

Income Limits

USDA loan income limits will vary by geographical region. However, no matter where you live, your annual income must fall below your local, mandated limit before you can qualify. 

In addition to location, the size of your household also affects the income limit that you will need to adhere to. It can be challenging to navigate these requirements on your own, so the USDA makes it easy for you.

The agency created this Guaranteed Housing Program Income Limits Map, broken down by county. Each county has separate rows for very-low-income, low-income, and moderate-income applicants, as well as adjusted income limits for household size. For instance, the income limit for a one-person household will typically be lower than the limit for an eight-person household. 

If your household size exceeds eight members, then you can add 8% to the four-person limit for each additional resident. 

Property Use

You can only use a USDA loan to fund an owner-occupied, primary residence. In other words, you cannot use this loan to purchase a vacation home in the country or an investment home that you intend to flip. It must be the home that you intend to own and live in full-time. 

Property Type

Most USDA loan programs exclude applicants who want to buy or build in a metropolitan area. However, some lenders will allow buyers who want to put down roots in the suburbs, where there is at least some rural component.

That said, any type of rural or country location is usually allowed under the USDA Loan Program. 

U.S. Citizenship

To qualify for a USDA loan, you must be a citizen of the United States. In addition, the agency also allows applicants who are officially recognized as permanent residents in this country. 

Debt-to-Income Ratio

Your debt-to-income (DTI) ratio divides all of your monthly debt payments by your gross monthly income. The higher that percentage is, the less you’re able to put aside and save each month. 

The USDA requires that your monthly mortgage payment be 29% or less of your total monthly income. This is the total payment, including:

  • Principal
  • Interest
  • Insurance
  • Taxes

In addition to your mortgage, the USDA also mandates that any other debt payments you make cannot equate to more than 41% of your total monthly income. The only way to get around this requirement is to have a strong credit score.

If your credit score is above 680, then the USDA may be willing to consider a higher DTI ratio on your application. 

Credit Score

As mentioned above, a good or excellent credit score can help you achieve eligibility for a USDA loan even if you do not meet certain criteria, such as the DTI ratio requirements. 

If your credit score is below 640, then the USDA will require you to complete intensive underwriting procedures as you proceed with your loan application. While these procedures won’t necessarily disqualify you, they can be time-consuming and complicated. On the other hand, applicants with a credit score of 640 or higher can usually take advantage of faster and more streamlined processing. 

What if you don’t have a credit score at all or you have a very limited credit history? In that case, the USDA will also consider your application, but there’s an extra step involved. Without a credit score to verify your creditworthiness, they’ll analyze your non-traditional credit references, such as your history of paying your monthly rent or utility bills on time. 

Solid Credit History

Your credit score isn’t the only aspect of your credit that the USDA will investigate. They’ll also check to make sure that your credit history is acceptable and meets their standards for approval.

Among other qualifying criteria, they’ll verify that you haven’t had any accounts sent to collections within the past 12 months. However, even if you have experienced this setback, it’s not a definite “no”.

The USDA will ask you to prove that your credit was affected by circumstances that were either temporary/short-term in nature or totally outside of your control. If you can provide evidence to the affirmative, such as documentation of a medical emergency, then they may still allow you to qualify for a home loan. 

Steady Income

To lower the degree of risk they have to incur, the USDA also wants to make sure that all applicants have access to steady, dependable income. Typically, the agency only accepts applicants who have worked at their current position for a minimum of 24 months. 

If your income is unstable or inconsistent, then there’s a chance that you could default on your mortgage loan payments. Proof of income in the form of tax documents or pay stubs can help assuage this concern.  

How to Apply for a USDA Loan

After reviewing the qualification criteria, do you believe that you’re eligible to apply for a USDA-backed loan? If so, then your first step is to connect with a participating lender. If you want to learn more about a USDA direct mortgage or apply for a USDA home improvement loan/grant, then you can reach out to the local USDA office in your state. 

Find and Finance the Property of Your Dreams

Now that you know more about USDA loans for new homes, are you ready to find a property that you can call your own? We can help you put down roots around beautiful Raleigh, NC!

In addition to existing homes for sale, we can also help you build in a Triangle community, with a variety of floor plans and options to consider. Feel free to browse our available properties online and contact us if you have any questions!

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