A USDA loan is a loan offered through the US Department of Agriculture and is a great option for many people. The term "USDA" makes a lot of people think of cows and/or beef and that sort of hints at what a USDA loan is meant for. USDA loans are designed to improve the economy and qualify of live in rural America. This is the "catch" with USDA. Not all houses or areas qualify. The minimum credit score for USDA is 620 in most cases. USDA does allow $0 down but the house must be in an eligible area. In other words, the house must be in an area that USDA has set as "USDA eligible." You may qualify for USDA, but you may not like a home that is in an USDA approved area.
You may or may not want to live out in the middle of nowhere surrounded by cow pastures. If you do, then you will probably have no issue finding a home in an USDA approved area. If you don't want to live in the middle of nowhere, you very well may still be able to find a home that qualifies for USDA as some areas that are in USDA eligible areas are not what most would refer to as "rural." There are often many neighborhoods in very desirable areas that qualify for USDA. The best way to determine if a house qualifies for USDA is to go to the below website and click on "Single Family Housing" under "Property Eligibility" and simply enter the address for a home:
The website will tell you almost immediately whether that home qualifies for USDA. It will also show a map with shaded areas that qualify and do not qualify. I encourage you to go to that website and enter various addresses so you can get an idea of the areas that qualify and areas that do not qualify.
Most of the time, if a person qualifies for USDA financing they will choose to do a USDA loan IF they are able to find a home that qualifies for USDA. Again, USDA allows $0 down and that is a HUGE reason USDA is so popular. USDA and FHA loans tend to have very similar monthly payments, so the only reason they wouldn't decide to do a USDA loan is because they cannot find a home in an eligible USDA area. For most people, they will attempt to find a USDA eligible home and if they are not able, they will then decide to go with an FHA or Conventional loan.
Other than a house having to be in an eligible area, there are also some other restrictions on USDA loans:
- Income Restrictions - To qualify for USDA, you and your family must be under the USDA income limit. For a family of 4 or less, the USDA income limit is $75,650 per year. For a family of 5 or more, the USDA income limit is $99,850. USDA will consider the income of every single person in the household even if everyone is not on the loan. For instance, if a father is applying for the loan by himself they will count the income of his wife even if she is not on the loan to determine if they are within the USDA income limit. USDA also will take the maximum potential income for a borrower to determine if they are within the income limit. For example, let's say John is paid a salary of $65,000 per year. With that alone, he would qualify. However, let's say that John is averaging $1,000 a month in overtime. USDA would take $1,000 per month and figure he will make $12,000 in the next 12 months in overtime. With his salary of $65,000 plus $12,000 in overtime, his maximum potential income would be $77,000 and thus he would now be over the income limit and not qualify. This is one of those rare cases where making too much money could be a bad thing.
USDA does take into consideration certain expenses and can subtract that from your income. One of the biggest expenses is childcare. Let's say that Jane is a single mom of 3 and makes $85,000 per year. With that alone, she would be over the income limit and not qualify. However let's say Jane pays $1,500 a month in childcare to a daycare facility. $1,500 a month is $18,000 per year. USDA would take her income of $85,000 and subtract $18,000 in childcare which means her USDA income calculation is $67,000 and thus she would qualify for USDA.
- Number of houses owned - You cannot qualify for a USDA loan if you currently own and live in a home as your primary residence. Unless, you need a larger home for your family or will be moving to a new area for work related purposes. For instance, let's say you own a 1 bedroom townhome but you were just recently married and had a child. USDA would allow you to purchase a new home as it is reasonable that you need a larger home for your family. Or, let's say you own a home in Miami but you were just transferred to Tampa for work. You would be able to buy a home in the Tampa area with a USDA loan.