- A USDA loan is for low- to moderate-income borrowers who buy a home in rural or suburban United States.
- USDA loans don't require any down payment, but you'll probably need at least a 640 credit score.
- Your eligibility depends on your property's location and your financial profile.
It can be difficult for many people to afford a home, especially if you have a low-to-moderate income. Things like down payments, interest, and closing costs are expensive.
But if you earn a relatively low income, you may qualify for a USDA loan — sometimes called a rural housing loan. This is a type of government-backed mortgage loan available for people who earn under a certain amount of money and live in rural or suburban parts of the U.S. It requires no down payment and can often help lower-income borrowers more easily afford a home.
Benefits of USDA loans
There are lots of advantages to using a USDA mortgage loan if you can qualify for one. These include:
Zero down payment
USDA loans are a type of zero-down-payment mortgage. Other than a VA loan (which is only for borrowers associated with the military), USDA loans are the only type of mortgage that doesn't require any down payment, making it easier to buy a home if you don't have a lot of money saved.
Low interest rates
Because it's a government-backed loan, you'll likely pay a lower interest rate on a USDA loan than you would on a conventional mortgage. Keep in mind that you'll get an even better rate with an excellent credit score, low debt-to-income ratio, or money toward a down payment.
Flexible credit requirements
The USDA doesn't have any hard-and-fast credit score requirements for these mortgages. Most lenders allow you to qualify with scores as low as 640.
No prepayment penalty
Some loans come with fees — called prepayment penalties — if you pay off the balance too early. USDA loans don't have these.
Lenient gift fund guidelines
If you're receiving gift funds for help with your home purchase, the USDA allows you to use them toward things like closing costs and even the appraisal (since there's no down payment to worry about).
USDA loan eligibility requirements
To get a USDA loan, both you and the property you're buying will need to meet certain requirements.
Income limits
USDA loans are only for low to moderate income earners. To qualify, you'll need to fall under the maximum income requirement for where you live. You can see your county's income limit here.
You'll also need to provide proof of stable income for at least the last two years, and your expected monthly mortgage payments should not exceed 29% of your monthly income. This number includes your loan principal, interest, insurance, taxes, and homeowner's association dues. Other debt payments should come to 41% or less of your monthly income. However, you could qualify with a higher debt-to-income ratio if your credit score is very good or excellent.
Property location
Only homes located in specific, USDA-approved suburban and rural areas are eligible for USDA funding. If you already know the address of the home you want to buy, enter the information into the USDA Property Eligibility Site to see if it's eligible.
Primary residents
You can't use a USDA loan to buy an investment property or vacation home. These loans are intended for primary residences only. You'll need to move into the home within 60 days of closing.
U.S. citizenship or qualified alien status
Finally, because USDA loans are guaranteed by the federal government, you must be a U.S. citizen or a permanent resident of the U.S. to qualify.
USDA loan types
There are two main types of USDA home loans. These are both backed by the U.S. Department of Agriculture.
Guaranteed loans
Guaranteed USDA loans are backed by the USDA — meaning the USDA assumes some of the risk on them, but you apply for your loan through a participating lender. The USDA doesn't issue your loan directly.
When people refer to a USDA loan, most are referring to a guaranteed loan, aka the USDA Rural Development Guaranteed Housing Loan Program. This is the most commonly used type of USDA mortgage.
Direct loans
These are loans that the USDA actually issues, so you'll apply directly with the USDA.
USDA Direct loans are for the lowest income borrowers, and you must meet stricter criteria.
USDA loan costs
USDA mortgages come with three primary costs (remember, a down payment is not one of them).
If you get a USDA loan, you'll owe:
- Closing costs: These come with every mortgage loan and typically run between 2% and 6% of the loan amount.
- Guarantee fee: This is a fee unique to USDA loans. It currently costs 1% of the loan amount, which you'll pay upfront at closing.
- Annual fee: There is also an annual fee for using the USDA loan program. This currently sits at 0.35% of the loan amount.
Some closing costs may be negotiable or, in some cases, you may be able to shop around for third-party service providers. Talk to your loan officer about these options.
How to get a USDA loan
If you're interested in getting a USDA loan, you'll need to follow this process:
Check eligibility
Review the USDA's income limits for your area, and make sure you fall under the appropriate threshold. You should also use the eligibility map to ensure the home you intend to purchase is located in a USDA-eligible area.
Find a USDA-approved lender
Shop around for a lender. Not all mortgage lenders are authorized to offer USDA loans, so you may need to do your research. Check with local credit unions and banks to start.
Get preapproved
Getting preapproved for your mortgage can help you gauge potential costs and give you a leg up when you start submitting offers. It shows sellers that you're serious about the purchase and are qualified for financing.
Complete the application
Once you choose a lender, fill out the application, provide your financial documentation, and await your home appraisal and closing date. Your loan officer will let you know if they need any additional information or documentation along the way.
USDA loan FAQs
No, you can't use a USDA loan to buy any home in a rural area. The property must meet certain USDA standards. It also must be located in an eligible part of the country. Use the department's map to find eligible properties in your area.
There is no official limit on USDA loans. Your lender will determine how much you can borrow based on your income, debts, and credit history.
USDA loans take around the same time as other types of mortgages. You can expect about 30 to 45 days to pass between application and closing.
