USDA loans are loans backed by the US Department of Agriculture, and were initially created to help farmers and other folks in rural areas secure financing for their homes and farms.

Fun fact: the 3.5% down requirement for FHA loans is actually set by US law. Due to how agriculture subsidization usually ends up playing out, a lot of farmers struggled to put forth that minimum payment. To work around this issue, the USDA created their own loan program to back qualifying individuals and their families.

In order to ensure that this loan program wasn't abused by folks simply trying to avoid a down payment on their loan, the USDA instituted several key restrictions to limit the types of borrowers who can qualify for their loan program, thereby ensuring that their loan would always be available to the farmers and rural folk the program was initially created to support.

Because of this, USDA loans are somewhat challenging to qualify for.

For starters, the USDA maintains strict 29% front-end, 41% back-end DTI thresholds. While it is possible to stretch the back end DTI to 43%, it's not guaranteed and will require specific provable compensating factors to assure the USDA that you're financially capable of maintaining a USDA-backed mortgage.

Additionally, USDA loans are governed by county-specific income thresholds; it's entirely possible for a household to earn too much money to qualify for a USDA loan. The thought behind this is that if a family is bringing in over the area average in income, then that family is more than qualified for another loan program.

The USDA is also specific as to the properties that can be financed with a USDA loan. For example, the properties must be located in rural areas, or otherwise areas with low area populations. The USDA is also hesitant to finance manufactured homes, unless the home itself is less than twelve months old or has a property-specific exception.

Besides these restrictions, USDA loans remain a fantastic way for folks to snag a country residence with very little money out of pocket. In fact, over 97.5% of the area in the United States is eligible for USDA financing, so this particular loan program may even be an option for your next home!