A USDA loan is a powerful financial tool, but it’s not a grant or a handout. The U.S. Department of Agriculture doesn’t lend money directly in most cases. Instead, it guarantees the loan for a private bank or credit union. This government backing reduces the lender’s risk, allowing them to offer favorable terms to the borrower.
This arrangement leads to the two biggest benefits of the program:
- No Down Payment: You can finance 100% of the home’s purchase price, eliminating the single largest barrier to homeownership for many people.
- Competitive Interest Rates: Because the loan is less risky for the lender, they can offer lower interest rates than many conventional loans.
USDA Loan Requirements: Do You Qualify?
Eligibility for a USDA loan depends on three key factors: the property’s location, your household income, and your financial profile.
Property Eligibility
The home must be located in a designated rural or suburban area. The USDA’s definition of “rural” is broad and includes many small towns and city outskirts. According to the department, approximately 97% of the U.S. landmass is within an eligible zone. You can verify a specific address using the official USDA Property Eligibility Map.
The property must also be your primary residence; it cannot be a vacation home or investment property.
Income Limits
Your household income cannot exceed 115% of the area’s median income. These limits vary by county and household size, as the program is designed to support low-to-moderate-income families. To see the specific limits for your area, use the USDA Income Eligibility Tool.
Credit and Financial Standing
While the USDA doesn’t set a hard credit score minimum, most approved lenders look for a score of 640 or higher. Lenders will also verify that you have:
- A stable and dependable income.
- A debt-to-income (DTI) ratio that shows you can comfortably afford the new mortgage payment.
- A responsible history of paying your bills on time.
Types of USDA Loans
There are two primary types of USDA home loans.
- Guaranteed Loans: This is the most common option. A USDA-approved private lender provides the financing, and the USDA guarantees 90% of the loan amount. It’s available for borrowers with low-to-moderate income.
- Direct Loans: In this case, the USDA acts as the lender. These loans are for low- and very-low-income applicants who cannot secure credit elsewhere. They often come with subsidized interest rates, sometimes as low as 1%.
Understanding USDA Loan Fees
Instead of Private Mortgage Insurance (PMI), USDA loans have two specific fees that make the program possible. These fees are subject to change, so always confirm current rates with your lender.
- Upfront Guarantee Fee: A one-time fee (currently 1% of the loan amount) that is typically financed by rolling it into the total loan balance.
- Annual Fee: A recurring fee (currently 0.35% of the remaining principal) paid monthly as part of your mortgage payment.
Even with these fees, the total monthly payment for a USDA loan is often lower than for other low-down-payment mortgages like FHA loans.
Frequently Asked Questions (FAQs)
1. Do I have to be a farmer to get a USDA loan?
No. This is a common misconception. The loan program is based on the property’s location, not the borrower’s occupation. It’s designed for any qualifying individual or family seeking to buy a home in an eligible area.
2. Are USDA loans only for first-time homebuyers?
No. Both first-time and repeat homebuyers can use the program, as long as they meet all eligibility requirements and intend to use the home as their primary residence.
3. What are the downsides of a USDA loan?
The main limitations are the geographic and income restrictions. If you want to live in a dense urban center or your household income is above the local limit, you won’t qualify. You must also pay the guarantee fees.
4. How does a USDA loan compare to an FHA loan?
Both are government-backed loans popular with borrowers who have limited savings. However, FHA loans require a minimum 3.5% down payment, while USDA loans allow for 0% down. FHA loans also have no geographic restrictions, whereas USDA loans are limited to specific areas. The mortgage insurance fees for each program are also calculated differently.
For more details on housing programs, you can visit the official USDA Rural Development website.