A 502 loan, or USDA Section 502 loan, is a government-backed, 100% financing (no down payment) mortgage designed to help low-to-moderate-income individuals buy, build, or repair homes in eligible rural areas. The program offers two main types—Direct and Guaranteed—aimed at making homeownership affordable for those who cannot obtain conventional financing.
Also known as the Section 502 Direct Loan Program, this program assists low- and very-low-income applicants obtain decent, safe and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant's repayment ability.
To qualify for the Section 502 program, the household's adjusted income cannot exceed the low‐income limit for the applicable location and household size. To qualify for the Section 504 programs, the household's adjusted income cannot exceed the very low‐income for the applicable location and household size.
The Section 502 Guaranteed Loan Program assists approved lenders in providing low- and moderate-income households the opportunity to own adequate, modest, decent, safe and sanitary dwellings as their primary residence in eligible rural areas.
You can be disqualified for a USDA loan if your income is too high for the area, your credit score is too low (generally below 640), your debt-to-income (DTI) ratio exceeds limits (around 41%), the property isn't in an eligible rural area, or the home itself has structural/safety issues, is too large/small for the area, or isn't for primary residency. Unstable employment or insufficient savings can also lead to denial, as can using the property for vacation or investment.
An income is too high for a USDA loan if it exceeds 115% of the Area Median Income (AMI) for your specific location and household size, with general limits around $119,850 for 1-4 members and $158,250 for 5-8 members in most areas, though these figures vary significantly by county and are adjusted annually, requiring you to check the USDA's eligibility site for precise limits.
If the applicant's credit score is less than 640 for 502 loans (or 620 for 504 loans), the Loan Originator must development a credit history from at least three sources. However, only two sources are required if one of those is a verification of rent or mortgage payments.
FAQ: USDA vs FHA loans
It's typically easier to get an FHA loan. FHA loans have more flexible credit requirements and no restrictions on location or household income, making them accessible to a broader range of buyers. Plus, more mortgage lenders offer FHA loans, so it's easier to find financing.
No. USDA loans don't require a down payment, unlike low down payment mortgages like FHA and conventional loans. Lenders who offer USDA loans give you the option of 100% financing, meaning you can borrow up to the appraised price of the home.
Disability consideration: If you receive public benefits like SSI, you may own one house that you live in, called a primary residence, otherwise your SSI benefit would be impacted. If you receive SSDI, you can own multiple houses or property and it will not impact your benefits.
Debt consolidation remains the most popular use for personal loans because they help borrowers save money by consolidating high-interest debt, like credit cards, with a personal loan with lower interest rates.
Housing costs including the mortgage principal, interest, taxes, homeowners insurance, annual fee and miscellaneous obligations (such as HOA fees) cannot exceed 29% of the buyer's income. The buyer's total debt including housing costs cannot exceed 41% of their income.
Common disqualifying issues include: Structural defects: Foundation problems, roof damage, or termite infestations. Health and safety hazards: Mold, asbestos, or lead paint. Inadequate utilities: Lack of safe water, electricity, or sewage.
Credit Rating: 502 is considered a very poor credit score. % of Population: About 14% of people have a credit score below 580. Borrowing Options: Most borrowing options are available, but the terms are unlikely to be attractive.
The buyer pays most fees by default, but there are plenty of exceptions. Seller concessions: With USDA loans, a seller can pay up to 6% of the purchase price to offset closing costs for the buyer. Lender credits: Lenders may be willing to cover a portion of closing costs in exchange for a higher interest rate.
A USDA loan is often better than an FHA loan if you qualify, offering 0% down payment and lower mortgage insurance fees, but it's restricted to specific rural/suburban areas and income limits. FHA loans are more flexible, available nationwide with no income limits and lower credit score requirements (starting at 500), but require a down payment (3.5%+) and typically have higher mortgage insurance costs, making USDA the winner for eligible buyers seeking maximum savings.
You can be disqualified for a USDA loan if your income is too high for the area, your credit score is too low (generally below 640), your debt-to-income (DTI) ratio exceeds limits (around 41%), the property isn't in an eligible rural area, or the home itself has structural/safety issues, is too large/small for the area, or isn't for primary residency. Unstable employment or insufficient savings can also lead to denial, as can using the property for vacation or investment.