8 Steps To Secure This 0% Down, Low-Interest Mortgage

30 March 2023

USDA loans offer extremely affordable terms to homebuyers, such as 0% down payments and low interest rates. But those who qualify for this loan will also want to keep in mind that the application process is a bit more complicated than for other loan types.

If you’re applying for a USDA loan (or thinking you might want to), check out this helpful checklist, which outlines all the things you must have in place to be approved. Just take it a step at a time, and rest assured that the rewards at the end are well worth the trouble.

1. Do you qualify for a USDA loan?

The basic qualifications for a USDA loan include the following:

  • You are a U.S. citizen or qualifying noncitizen (such as a permanent legal resident or qualified alien)
  • You have a credit score of at least 640 (though some lenders will negotiate with applicants who have slightly lower scores)
  • You have a stable income and can pay a mortgage for at least 12 months (or can show savings that would cover the mortgage for a year)
  • You can show a steady employment history for at least two years
  • Your debt-to-income ratio is less than 43%

2. Does your income fall within USDA loan limits?

USDA loans are designed to help lower-income homebuyers who can still afford housing payments; as such, applicants must fall within certain minimum and maximum compensation levels that vary by area.

There are two types of USDA loans, each with their own thresholds. Individuals applying for a direct loan from the USDA must generally be between 50% and 80% of the local income limit. The limits for a guaranteed loan are a bit more lenient, in that applicants must not make over 115% of the local income limit.

In 2023, the USDA income limit for households with one to four members is $103,500 in most U.S. counties. However, your area’s exact income loan limits could be higher or lower; check the loan limits on the USDA map.

3. Where is your local Rural Development office?

If you’re submitting a direct loan application, you will have to work directly the USDA. And though it may be started online, you’ll still ultimately need to submit your application to your local Rural Development (RD) office.

If you’re applying for a guaranteed loan, you’ll submit your application directly to a lender who offers USDA loans. However, your application will also still eventually end up at the Rural Development office in your area for final approval, so knowing its location is smart in case you want to check on processing turnaround time or to ask any questions you might have. To find your state and local USDA offices/contacts, visit the USDA’s interactive map, where you can browse by state.

4. Is your lender USDA approved?

If you are applying for a direct loan, you don’t need to worry about this step, since the financing for your loan will come directly from the USDA. However, if you’re in the more moderate income category and are requesting a guaranteed loan, then you’ll need to find a lender who is USDA approved. Not all lenders offer this type of loan.

To find these lenders, check the following official USDA list to find approved lenders in your state. Make sure to ask any lenders you contact how often they underwrite USDA loans. You can ask if there are certain agents who have completed specialized USDA loan training, at each facility. Those loan officers will have the best knowledge to help guide you through the process.

5. Is the home’s location USDA loan eligible?

USDA loans are designed to help populate rural areas. Luckily, 97% of the United States is defined as “rural” enough to qualify. Here’s how to be sure if an area fits the bill.

  • Find out the population of an area. USDA loans are not offered in places with more than 35,000 residents.
  • Keep an eye out for indications of eligibility, in the listings you peruse. For example, USDA-loan-qualifying homes listed on Realtor.com® will typically tout this benefit.
  • Ask any lenders or real estate agents you are working with if a property or area is USDA loan eligible.
  • Type the actual address of a home into the USDA’s property eligibility tool and get an instant verification.

6. What is the area’s loan limit?

This is an important number to know for a couple of reasons.

If you’re applying for a direct loan, it’s the maximum amount you can be approved for in an area. In other words, you will not be able to buy a home that costs more than the area loan limit, using a USDA direct loan.

With a guaranteed loan, there are technically no limits on the amount you can borrow (the loan amount is determined between an applicant and a lender, based on what they think the borrower can afford). However, USDA loan applications should still know the area loan limit, because the home being purchased must be considered “modest,” and a property’s sales price is one indicator of that.

The area loan limit will give you an estimate of what the USDA might consider an appropriate home choice. You can check the USDA’s interactive loan limits map to pinpoint that number.

7. Does the home itself meets USDA standards?

While the USDA’s property eligibility tool will identify houses that are located in qualifying rural areas, each individual home must also pass certain tests in order for a USDA loan to be granted.

It’s important for anyone looking for a USDA eligible home to keep these things in mind:

  • A home must be deemed “modest,” meaning you’re not going to get a USDA loan for a mansion.
  • The home generally should be between 400 and 2,000 square feet.
  • It must be a single-family home (which may include some condos and townhouses, as well as resales and new construction).
  • The home cannot be used for income-producing purposes. In other words, if there are farm buildings on the property, they can only be used for storage—not for farming.
  • The home must be structurally sound, with running water, heating, cooling, and electricity.

Also remember that you will have to guarantee that any home you purchase with a USDA loan will be your primary residence, and you must move in within 60 days of closing.

8. Do you have all the paperwork you need to apply?

Ultimately, whether you apply for a direct or a guaranteed USDA loan, you will have to show proof of your financial situation. And this includes income for everyone who will be living in the home (including any children or parents who may be living with you).

Make sure you have copies of these documents ready:

  • Tax returns from the previous two years
  • W-2s from the last two years
  • 30 days of pay stubs
  • 1099s (if you are self-employed or an independent contractor)
  • Driver’s license or some other form of government-issued photo identification
  • Two months of recent bank statements

Having the above minimum records handy will help streamline your process.