What Is a USDA Loan?

Homebuyers looking to escape the hustle and bustle of city life may long for a quieter life in the country. But anytime you’re considering making a major lifestyle change, finances can become an issue.

family rural home

If this sounds like you, you may be able to qualify for a USDA loan. This government-sponsored loan program focuses on houses located in designated rural and suburban areas.

What is a USDA home loan?

A USDA home loan is a type of mortgage for eligible rural and suburban homebuyers. It’s offered by the United States Department of Agriculture. USDA loans are issued through the USDA Rural Development Guaranteed Housing Loan Program.

One of the biggest draws of the Rural Development program is that it doesn’t require any down payment. So, you can purchase your own home with a minimal amount of cash.

If you think this sounds like a good opportunity, you may be right. Keep reading to find out the benefits of applying for a USDA loan.

What are the different types of USDA loans?

The USDA offers three main mortgage programs for people who want to buy or repair a single-family home in a rural area:

  • USDA Direct Loans: Also known as Section 502 direct loans, these loans are issued to qualifying low-income borrowers with interest rates as low as 1% with certain subsidies and no down payment is typically required.
  • USDA Guaranteed Loans: Also known as the Section 502 Guaranteed Loan Program, these loans are issued by USDA-approved lenders and offer 100% financing, low interest rates, and minimal down payments to eligible buyers.
  • USDA Home Improvement Loans: Also known as the Section 504 Home Repair program, these loans are given to qualified homeowners to repair, improve, or modernize their homes. They’re also given to low-income elderly homeowners to remove health and safety hazards. The home improvement loan is up to $$40,000 and grants are also available up to $10,000. Additionally, loans and grants can now be combined for up to $50,000 in assistance.
  • USDA Streamline Refinance: Those with an existing USDA loan may be able to take advantage of lower rates with a USDA refinance loan. For those who qualify, the USDA streamline refinance is an attractive option as it does not require a home appraisal or income documentation. However, to be eligible, you must already have a USDA loan.

How much can I borrow with a USDA loan?

The majority of loans offered by the U.S. Department of Agriculture (USDA) do not feature loan limits. Direct Loans are the only type of USDA loans with specific limits, but they are a small portion of all USDA loans. Therefore, it is unlikely that you will find any limits on your USDA loan.

For the USDA Direct Loan program in 2024, the loan limit is 766,550 in most parts of the country. However, in more expensive high-cost areas, the loan limits are higher.

4 Benefits of a USDA Loan

Listed below are the four biggest advantages of taking out a USDA loan.

1. No down payment

For many people, the thought of scraping together a down payment is the most significant barrier to buying a home. But with a USDA loan, there’s no down payment required. In comparison, you’ll need a 3.5% down payment for FHA loans and a minimum 5% down payment for conventional loans.

2. Low private mortgage insurance (PMI)

Anyone who buys a home with no down payment must purchase private mortgage insurance (PMI). The costs vary, but PMI generally costs between 0.5% to 1.0% of the total loan amount.

With the USDA mortgage program, you still have to purchase PMI, but the rates are lower than they are with a conventional loan.

3. Low credit requirements

USDA loans also come with more flexible credit requirements than what other lenders look for. If your credit score is at least 640, your application should be approved pretty quickly. And the program is available for borrowers that are short on credit history.

4. Finance your closing costs

When you buy a home, the lender charges closing costs for issuing the loan. The closing costs usually fall between 2% and 5% of the total loan amount. So if you buy a $200,000 home, you can expect to pay at least $4,000 in closing costs.

When you take out a USDA loan, you can roll your closing costs into the loan financing. This means you can finance your closing costs instead of paying them out of pocket.

How do you qualify for a USDA loan?

Taking out a USDA loan doesn’t mean you have to move to the middle of nowhere. There are a wide variety of properties eligible for purchase through the USDA loan program.

While you won’t find any homes located in a major metropolitan area, you may be able to find some in certain suburban areas. But, of course, the most extensive selection is available in rural areas since the purpose of the program is to strengthen these communities.

To find out if a home you’re interested in qualifies, simply input the address into the USDA website. The USDA does have strict requirements the home must meet to be eligible for the program, which we’ll discuss in more detail below.

See also: First-Time Home Buyer Grants and Programs

USDA Loan Requirements

If you can’t qualify for a conventional loan, you may be eligible for either a USDA guaranteed loan or a USDA direct loan. Here is an overview of the borrower requirements for USDA home loan programs:

  • You must be a U.S. citizen, non-citizen national, or qualified alien.
  • The home must be located in an eligible location.
  • You must be purchasing the home as your primary residence.
  • The loan must be taken out through a USDA-approved lender.
  • You must be able to meet the minimum credit requirements.

Income limits

USDA loan programs are designed to help low to middle-income families, so borrowers must meet certain income limitations. To qualify, your household income cannot exceed 115% of the median income in your area.

The income requirements for USDA loans are determined by county, so you can check the USDA’s website to determine the requirements in your area. You can also work with a USDA-approved lender to determine your eligibility.

Property Eligibility

The U.S. Department of Agriculture also puts certain restrictions on the type of property you can buy with a USDA loan. Here are the types of properties that are eligible for a USDA mortgage loan:

  • Single-family homes
  • New construction homes
  • Townhomes and approved condos
  • Planned Unit Developments
  • Approved modular homes

What credit score do you need for a USDA loan?

If you’re applying for a guaranteed USDA loan, there are a few basic credit requirements you’ll need to meet. The USDA doesn’t set a minimum credit score requirement, but your application will get processed much faster if your credit score is at least 640.

A credit score below 640 doesn’t automatically rule you out, but your application will go through stricter underwriting guidelines. This is to ensure you can handle the monthly payments.

And you’re less likely to be approved if you have any collections on your credit report in the past 12 months. However, you may be granted an exception if you can prove that your credit was damaged because of a medical issue or something outside your control.

And finally, a USDA loan may be a viable option for you if you’re still in the process of building your credit scores. Your application may be approved even if you have a limited credit history if you can supply other credit references, like utility payments or rent payments.

USDA Income Limits

Income limits are set on all USDA loans to ensure the USDA loan program benefits low to middle-income families. These income restrictions are determined by various factors, including the median income for your local city or county. You can check your income eligibility to find out if you qualify.

The size of your family also helps determine your eligibility. If you have a large family, then it’s expected you’ll need a more substantial income to live on, and you’ll receive more leeway.

There are also different tiers of eligibility, depending on the type of USDA loan you’re taking out. For example, USDA guaranteed loans call for a moderate income, whereas USDA direct loans require applicants to fall in the low-income category.

Stable Income

Finally, you must have a stable monthly income to be eligible for a USDA loan. Usually, you need to show a history of stable employment for at least 24 months.

If you have questions about your eligibility, you can contact a mortgage lender that specializes in USDA loans. Just be sure to ask so you don’t waste your time working with a lender who doesn’t understand the nuances of USDA loans.

Real estate agents that work in a rural area may also be able to point you in the right direction, since they’re likely to have more experience with clients utilizing these programs.

Are there any other eligibility requirements?

This article is mainly focused on the USDA’s requirements, but keep in mind, the USDA isn’t lending you any money. Each lender can apply its own requirements as long as they meet the USDA’s basic guidelines. Your lender will want a complete financial picture, as well as your credit history and current employment status.

And one of the guidelines surrounds PITI, which stands for principal, interest, taxes, and insurance. Each of these things are combined to form your total monthly mortgage payment.

This amount can’t be more than 29% of your pre-tax monthly income. So if you make $3,000 per month, your total monthly payment would have to be less than $900.

Debt-to-Income Ratio

Another common requirement is known as your debt-to-income ratio. This is when the lender looks at compares your income to your total monthly debt payments. Ideally, your debt-to-income ratio shouldn’t be higher than 41%.

So if your income is $3,000 per month, your total monthly debt payments should be less than $1,230. And remember, your mortgage will be included in the total debt payments. But you may qualify for a higher debt ratio if your credit score is higher than 680.

Bottom Line

With a USDA mortgage, you can purchase your dream home without having to save up for a down payment. However, not everyone will qualify for this program.

If you’re interested in taking out a USDA loan, you should start by finding out if you meet the income restrictions in your county. And you might consider working with an experienced USDA lender to find out if you’re a suitable candidate for the program.

Frequently Asked Questions

How does a USDA loan work?

USDA loans provide low-interest home mortgages to qualified borrowers. These loans are issued by the United States Department of Agriculture, and are designed to help eligible borrowers purchase homes in rural areas and some suburban areas.

To qualify for a USDA loan, borrowers must typically meet certain income and credit requirements, as well as have a debt-to-income ratio that is lower than the national average. Once approved, the loan is typically issued in the form of a 30-year fixed-rate mortgage, with the interest rate set by the USDA. Borrowers can then use the funds to purchase a home and make mortgage payments over time.

What’s the difference between FHA, VA, and USDA Loans?

FHA loans are mortgage loans insured by the Federal Housing Administration that are available to homebuyers with less-than-perfect credit and relatively low down payments.

VA loans are mortgage loans guaranteed by the U.S. Department of Veterans Affairs that are available to qualifying veterans and military members with competitive terms and no down payment.

USDA loans are mortgage loans offered by the U.S. Department of Agriculture that are available to low-income borrowers in rural areas.

All three loan types require mortgage insurance, but the payment requirements vary.

What is the interest rate on USDA loans?

The interest rate on a USDA loan varies depending on the type of loan, the lender, the borrower’s credit score and other factors. Generally, USDA loan interest rates range from 1.00% to 4.00%.

The current interest rate for Single Family Housing Direct home loans is 3.75%. This fixed rate is based on current market rates at loan approval or loan closing, whichever is lower.

If payment assistance is applied, the interest rate can be as low as 1%. The payback period can be up to 33 years, or 38 years for very low-income applicants who can’t afford the 33-year loan term.

What are the fees associated with a USDA loan?

The upfront guarantee fee is 1% of the amount of the loan, and this fee must be paid at closing. This fee is non-refundable and is not included in the loan amount.

In addition to the upfront fee, there is an annual fee, which ranges from 0.35% to 0.50%. This fee is calculated as a percentage of the loan amount and is generally due each year.

USDA home loans also have other typical closing costs associated with them, such as appraisal fees, title fees, and recording fees.

Jamie Johnson
Meet the author

Jamie Johnson is a freelance writer who has been featured in publications like InvestorPlace and GOBankingRates. She writes about various personal finance topics including student loans, credit cards, investing, building credit, and more.