USDA loan eligibility: the three tests, step by step

Test 1: the place

Start with the property, because it is the fastest test and the one that most often rules a home in or out. USDA's eligibility site lets you enter an address or browse a map of eligible areas. Many small towns and some areas at the edge of metro regions qualify. Check every address you are serious about, since boundaries can run between neighborhoods.

The home must be your permanent residence. USDA lists eligible property types: new or existing homes, including detached and attached homes, condos, planned unit developments, modular and manufactured homes. There is no set acreage limit, but the property cannot be income-producing.

Test 2: the household income

USDA's rule is that household income cannot exceed 115 percent of the area's median household income. Two details trip people up. First, income is counted for the household, which can include adults who live with you but will not be on the loan. Second, USDA allows certain adjustments, so the income that counts may differ from your gross pay. The eligibility site has an income tool for your county and household size, and an approved lender can calculate it properly.

The calculator below compares your household income with the limit you look up. Use the exact figure shown for your county.

Test 3: occupancy and status

Applicants must agree to personally occupy the home as their primary residence. They must also be a U.S. citizen, a U.S. non-citizen national or a qualified alien. Second homes and rentals are not eligible.

Credit

USDA states that the program has no credit score requirement, but applicants must demonstrate willingness and ability to handle and manage debt. In practice, lenders use USDA's automated underwriting system and their own standards, so a stronger score and steady payment history make the process smoother.

What the loan can pay for

USDA lists eligible uses that go beyond the price. Closing costs and reasonable expenses associated with the purchase may be included in the transaction. Repairs and rehabilitation associated with buying an existing home are eligible, as is essential household equipment that conveys with the dwelling, such as ovens, refrigerators, washers, dryers and heating and cooling equipment, and site preparation such as grading, driveways and fences.

Rates, term and fees

The guaranteed loan is a 30-year fixed rate loan, and lenders set the rate, so comparing lenders matters. Instead of private mortgage insurance, USDA charges a nonrefundable upfront guarantee fee and may charge an annual fee, which lenders can pass on to the borrower. Federal regulation at 7 CFR 3555.107 caps the upfront fee at 3.5 percent of the loan and the annual fee at 0.5 percent of the average scheduled unpaid balance, and USDA announces the current rates within those caps. Ask your lender to show the current fees on your Loan Estimate.

If you do not qualify

If your income is lower, USDA's Direct loan program may fit: it lends directly to low- and very low-income households and can include payment assistance. If your income is too high or the address is not eligible, FHA and conventional low down payment programs are the usual alternatives. The FHA and conventional files compare them.