There is hope for borrowers who cannot get a conventional loan and have low to moderate income. The USDA loan program offers no-down-payment, 100 percent financing through a guaranteed loan for families buying a home in rural and suburban areas.

What Is A USDA Guaranteed Loan?

The guaranteed loan is just one of two types of loans designed to encourage rural development that is offered through the USDA.

The other USDA mortgage is a direct loan for very low-income households. They are made directly from the government and can be subsidized to as low as 1 percent interest rate.

However, the guaranteed loan is not subsidized and does not require a Congressional appropriation every year, says Joaquin Tremols, director of the USDA Rural Housing Service’s Single Family Housing Guaranteed Program in Washington, D.C. And recipients can still get a good interest rate.

“You have to apply with an approved lender. They take our training before we cut them loose,” he says.

Eligible applicants can use the guaranteed loans to build, rehabilitate, improve or relocate a dwelling, too, besides just buying a home in an eligible rural area. And you might be surprised what real estate meets the USDA loan program property requirements. Many suburban areas close to big cities qualify.

Because the program is backed by the U.S. Department of Agriculture, this loan program can help qualifying home buyers to avoid mortgage insurance (PMI).

How much USDA loan can I qualify for?

Unlike the FHA program, there are no loan limits for the USDA loan program. Because the program is intended to help low and moderate-income borrowers become homeowners, there are income limits for borrowers but no limits on the loan amount itself. Instead, the size of your loan is determined by the specifics of your financial situation — and the area where you’re buying.

If your monthly income is below the income limit for the area and your financials indicate an ability to make your mortgage payments, you will probably be approved.

The size of USDA loan you can qualify for will be determined by your credit history, debt-to-income ratio, assets and saving, and monthly income.

Who Is Eligible for A USDA Loan?

According to the USDA Single Family Home Loan handbook, applicants may be eligible to receive a guaranteed loan if they

• Meet income eligibility
• Agree to personally occupy the dwelling as their primary residence
• Are U.S. citizens, U.S. non-citizen nationals, or qualified aliens
• Have the legal capacity to incur the loan obligation
• Have not been suspended or debarred from participation in Federal programs
• Are purchasing a property that meets all program criteria

USDA Income Geographic Differences

Being approved as income-eligible can be tricky because so many things are included in the figure. Plus, the income limits are different depending on where you live. Let’s start with two examples of the difference in income limits from opposite sides of the country.

If you were looking to buy a house in the rural areas of Buffalo, N.Y., with a USDA moderate guaranteed loan and a four-person household, you could have an income of $77,850. For families of five or more, that figure goes up to $102,750.

If you travel across the U.S. to an expensive area of San Jose, California, the four-person household income limit is $122,050 and jumps to $161,100 for five or more people.

According to the USDA loan program, moderate-income typically means you make 115 percent or less of the median income for your geographic region. As a basic example, if families average $50,000 per year in your area, your family can make up to $57,500 per year and still be eligible.

Income limits vary widely and tend to rise significantly around major metro areas.

Those interested in the USDA loan can easily check their income eligibility here.

The USDA website also details property eligibility in areas all across the country.

“You can punch in an actual property address — in case you were looking at a certain home — and submit the information. It will tell you if it’s in the USDA loan rural area. It’s pretty nifty,” Tremols says.

If your income meets these requirements and you’re looking to buy in a qualifying area, then the zero-down USDA loan program can be an attractive loan option — especially for first-time homebuyers.

What Counts as Income According to USDA?

As for income eligibility though, the government counts income from all adults in the household who are 18 or older — not just parties who are signing the mortgage loan. Their income must be included in the annual income for eligibility purposes, according to the USDA guaranteed loan handbook.

For instance, the Social Security checks received by your mother-in-law who lives with you will also go towards that income eligibility. You also will have to count up to the first $480 of earnings for any children, including full-time college students even if they live away from home temporarily during the year.

Other counted income includes:

• Employee housing or automobile expense allowances
• Military and self-employed income
• Alimony/child support
• Pension/retirement income
• Rental income
• Disability/social security checks
• Unemployment compensation

Income that Doesn’t Count Toward Your Eligibility Income

There are some income types that will never be counted, according to the handbook.

Income that is not considered toward your household total, for eligibility purposes, includes

• Payments received for the care of foster children or foster adults in the home
• Earned income of a minor
• Employer-provided fringe benefit packages, even if displayed on the applicants’ pay statements
• Section 8 housing vouchers
• Any student financial aid, including student loans
• Money gifts of money or lump sum inheritances, capital gains or insurance payments under health, accident or worker’s compensation policies

Lenders can help potential buyers find deductions for their annual income to meet the eligibility requirements, Tromels says.

“Some people do benefit from these deductions,” he says. “The handbook shows many various examples in the handbook.”

USDA Income Eligibility Deductions

According to the USDA mortgage underwriting guidelines, the allowable deductions to determine an adjusted income can include:

• $480 for each minor child under 18
• $480 for each disabled or handicapped individual who is not the applicant or co-applicant on the loan
• $480 for each full-time student 18 years or older
• $400 for each elderly (62 years of age or older) or disabled applicant
• Total amount of medical expenses for any elderly family member that exceeds 3 percent of gross annual income
• Actual cost of child care for children 12 years and younger with full documentation of cost

“People like this loan because there is no down payment, and there is 100 percent financing,” Tremols says. “They are all simple 30-year fixed loans with no balloons, no interest-only or adjusted interest rate.”

Qualification and Income Eligibility are Different

Remember that your total household income for eligibility purposes could be different than your qualification income. For instance, an elderly parent who will live in the home might have a job and earn income. For eligibility purposes her income counts, but you can’t count that income toward the income on your loan to help you qualify unless the elderly parent is on the loan.

Check Your USDA Income Eligibility

USDA income eligibility is lenient in that families can make up to 115% of the typical income for the area and still qualify. Prospective home buyers should check all the requirements with an approved USDA lender to see if they are buying in an eligible area — and whether they qualify.