USDA loans: eligible areas, income limits and fees

How does a USDA guaranteed loan work?

An approved private lender makes the loan, and USDA Rural Development guarantees it. You apply through a participating lender, not USDA. The federal rules are in 7 CFR Part 3555.

• Purpose. The loan buys a home that you will live in as your principal residence. Investment properties and temporary, short-term housing are not eligible.
• Term and rate. The term may not exceed 30 years, and the interest rate must be fixed over the term.
• Loan amount. The loan cannot exceed the lesser of the appraised value plus the upfront guarantee fee, or the purchase price plus allowable acquisition costs. For a purchase at the appraised value, that means no down payment. A new home that cannot meet the inspection and warranty requirements for an existing dwelling is limited to 90% of market value.
• Citizenship. Applicants must provide acceptable evidence that they are U.S. citizens, non-citizen nationals or qualified aliens.

Which areas are eligible?

The property must be in a rural area. Federal regulation says the definition of “rural area” is found in section 520 of the Housing Act of 1949. USDA publishes an eligibility map on its website. USDA also warns that viewing the map is not a final determination: Rural Development decides property eligibility when it receives a complete application. Check an address on USDA’s tool before you fall in love with a house, and ask your lender to confirm.

What are the income limits?

By statute (42 U.S.C. § 1472(h)), borrowers’ incomes cannot exceed 115 percent of the area median income, as the Secretary determines. In the regulation, the moderate income limit is the greatest of:

• 115% of the U.S. median family income;
• the average of the state-wide and state non-metro median family income; or
• 115/80ths of the area low-income limit, adjusted for household size.

The limit used is for the county or metropolitan area where the home is. USDA publishes the dollar limits by county and household size on its Income Limits tool, so this guide does not list them. The regulation counts the income of all household members who live or will live in the dwelling. Lenders also test repayment ability. The regulation caps housing costs at 29% of repayment income and housing costs plus recurring debts at 41%, with exceptions for compensating factors such as a credit score of 680 or higher.

What fees does USDA charge?

Two fees apply, and the program notice sets them each fiscal year.

The lender pays both fees to USDA but may pass them on to the borrower. The upfront fee is nonrefundable once the guarantee is issued. The fees apply to purchases and refinances. USDA’s notice says the fee schedule depends on the fiscal year; the Conditional Commitment date determines which year’s fee applies. Ask your lender which fiscal year’s fee applies to your loan.

A worked example

This is an example, not a quote. Assume a $250,000 purchase price that matches the appraised value, no down payment, and a lender that passes both fees through.

The annual fee is charged on the average unpaid balance, so it shrinks as you pay down the loan. Your lender decides how it passes the fee through, so read the Loan Estimate. Compare with FHA loans, which charge a 1.75% upfront premium, and with conventional loans.

What costs does the loan not cover?

The loan amount is capped as described above, so ask your lender which closing costs the cap lets you finance and which you pay in cash; see closing costs explained. Start with mortgage preapproval and compare with the down payment options for other programs.

Where states differ

Eligible areas, fees and the income formula come from federal rules, but the dollar income limit depends on your county, and state housing agencies may run their own rural or first-time buyer programs. Property taxes, transfer taxes and closing costs also differ by state. See Texas and California first-time buyer programs, and closing costs in Texas or California.