What are USDA loans and am I eligible for one?

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USDA loans offer low rates and no down payment to rural homebuyers. Learn more about these government loans and how to qualify. (iStock)

If you’re planning to buy a home in a rural area, you may be eligible for a USDA loan, depending on your income and other factors. USDA loans don’t require a down payment and are often available even if your credit isn’t great. 

Understanding the ins and outs of USDA loans will help you determine the benefits and risks, and whether this type of loan is right for you. Here’s what you need to know about USDA loans, including who’s eligible for one. 

What are USDA loans?

USDA loans are mortgage loans guaranteed by the U.S. Department of Agriculture. These loans don’t require a down payment and come with low interest rates. USDA home loans are designed to help low- to moderate-income families afford housing in rural areas of the country. 

The Department of Agriculture defines a rural area as a region that has a population of less than 35,000. Housing repair loans are available to help buy, repair and update existing rural homes, including eliminating any health and safety risks. 

In 2019, the Department of Agriculture provided more than 99,000 USDA loan guarantees to families across the U.S., Guam, Puerto Rico and the Virgin Islands. 

USDA loans vs. conventional loans

USDA loans and conventional loans are both types of mortgages available to finance home purchases. The primary difference between these loans is that the federal government doesn’t back conventional loans. Like VA loans and FHA loans, USDA loans have the backing of the federal government, giving borrowers access to extra benefits. 

Conventional loans typically require a 20% down payment, while USDA loans don’t require any down payment. Interest rates for USDA loans are often comparable or lower than you can find with conventional loans. 

Borrowers who don’t meet down payment requirements for a conventional loan may be required to buy private mortgage insurance, or PMI. USDA loans don’t require you to buy mortgage insurance, though some types of USDA loans come with an annual guarantee fee. 

If you’re looking for a mortgage loan, Credible lets you compare mortgage rates in one place.

USDA loans vs. FHA loans

USDA loans and FHA loans are both government-backed loans. The Department of Agriculture backs USDA loans, while the Federal Housing Authority guarantees FHA loans. 

These loans differ in some key ways:

  • Down payment requirements — USDA loans don’t require a down payment. But FHA loans require a down payment of either 3.5% (if your credit score is 580 or higher) or 10% (if your credit score is between 500 and 579).
  • Credit score requirements — Minimum required credit scores vary with USDA loans, too — you’ll most likely need a minimum credit score of 640 to qualify for automatic approval, although you can still qualify for manual underwriting with a lower score. For an FHA loan, your score can be as low as 500, provided you have a 10% down payment.
  • Mortgage insurance — FHA loans also come with costly up-front mortgage insurance premiums, typically 1.75% of the loan amount. You’ll also pay an additional annual mortgage insurance premium in monthly installments, usually between 0.45% and 1.05% of the loan amount, for the life of the loan. In some cases, you may also pay an insurance premium on USDA loans if you don’t make a down payment.
  • Borrowing limits — There are no set lending limits for USDA loans — the USDA sets a maximum amount for each borrower based on eligibility. In 2021, the FHA lending limits vary depending on the county and range from $356,362 (low-cost counties) to $822,375 (high-cost counties).

How do USDA loan programs work?

People who want to purchase or fix up a single-family home in small towns have three types of USDA loans to choose from. Each loan works differently but they’re all designed to make homeownership possible for those who don’t qualify for traditional mortgage loans. USDA loans can also bolster the economy and quality of life in rural America.

The U.S. Department of Agriculture either directly provides or guarantees USDA loans. Eligibility for these loans is based on income and varies depending on the average median household income for each designated area. The loan repayment period ranges from 20 to 38 years, depending on the type of loan. Only properties meeting USDA guidelines are eligible for loans, which are typically restricted to modestly-sized single-family homes. 

Another marker of USDA loans is low interest rates, meaning borrowers likely won’t pay as much in interest over the life of the loan. 

USDA loans don’t require a down payment, which can allow you to buy a home without saving up thousands of dollars in advance. But that doesn’t mean there aren’t any added costs associated with a USDA loan. Borrowers with USDA guaranteed loans must pay a loan guarantee fee of 1% of the borrowed amount. Guaranteed loans also come with an annual fee of 0.35% of the loan balance. USDA Direct loans don’t require mortgage insurance.

What are some benefits of USDA loans?

Here are some benefits to consider when deciding whether a USDA loan is right for you. 

  • No down payment — USDA loans don’t require any down payment.
  • Low fixed-interest rate — USDA loans come with low fixed-interest rates that are competitive or lower than other types of mortgage loans.
  • Flexible requirements — The USDA’s underwriting guidelines are more flexible than traditional lenders, with no specific credit score requirement to qualify.
  • Closing costs — You can choose to roll the loan guarantee fee into your loan instead of paying it up front.
  • No prepayment penalty — There’s no prepayment penalty if you pay off your USDA loan before the term ends.
  • Finance repairs — You can take out a USDA loan to fund repairs on your existing home to bring it up to date and meet current safety standards.
  • Purchase or refinance — You can use a USDA loan to purchase a home or to refinance an existing mortgage loan.

What are the requirements for USDA loans? 

While requirements vary based on location and the type of loan, here are some of the general requirements you’ll need to meet if you want to qualify for a USDA loan.

  • Primary residence — The home you purchase with a USDA loan must be your primary residence.
  • Credit score — There’s no specific credit score requirement to qualify for USDA loans. Your credit and payment history are used to determine your ability to pay back the loan. Borrowers with a credit score above 640 should have an easier time qualifying, provided they meet other loan requirements.
  • Income limits — For USDA loan guarantees, your income shouldn’t exceed 115% of the median household income. You’ll need to provide documentation of at least one year’s worth of income, and two years’ worth of income if you’re self-employed.
  • Debt — Your debt-to-income ratio, including the new mortgage payment, should be less than 41% of your gross monthly income, although you may still qualify if it’s not.
  • Location — Where you plan to purchase a house plays a huge role in qualifying for a USDA loan. You can check if your area is eligible on the USDA website.
  • Citizenship status — You must be a U.S. citizen, U.S. non-citizen national or qualified alien to be eligible for a USDA loan.

USDA loans may also be subject to state and local regulations, so research your area before applying for a loan. 

Credible lets you compare mortgage rates to see what types of loans you may be eligible for.

How do you apply for a USDA loan?

You can apply for a USDA loan through the Department of Agriculture website or search for an approved lender in your area (for loan guarantees). You may be asked to provide personal and financial information, including your:  

  • Full name
  • Physical address
  • Phone number
  • Birth date
  • Social Security number
  • Annual income
  • Employment history
  • Assets
  • Property information

Lenders use information like your credit score, payment history, credit utilization and age of credit accounts when considering you for a loan. Loan application processing times depend on funding availability and the lender. 

Types of USDA loans

Three types of home loans are available through the Department of Agriculture, each with its own eligibility requirements. 

Direct USDA loan

Single-Family Housing Direct Home Loans are received directly from the Department of Agriculture. Low-income borrowers in rural areas can use a direct loan to purchase, build, repair, renovate or relocate a home in designated rural areas.

Guaranteed USDA loan

With the single-family housing guaranteed loan program, USDA loans are available through approved private lenders with the backing of the USDA. Interest rates vary depending on the lender. 

USDA home improvement loans and grants

Single-Family Housing Repair Loans are designed to help extremely low-income families repair and update their existing homes in designated rural areas. Grants are also available to elderly low-income individuals who need to repair their homes to remove any safety or health hazards. 

Is a USDA loan right for you?

If you live or plan to live in what’s considered a rural area and have a low or moderate income, a USDA loan might be a great way to buy a home. A USDA loan is especially helpful if you don’t qualify for a mortgage loan through traditional methods and don’t have a 20% down payment. 

If you don’t qualify for a USDA loan, you still may be eligible for other types of mortgages. It's important to research your mortgage options and shop around to find the best mortgage loan for your situation.

You can compare mortgage rates and lenders using Credible.