Zing Images/Getty Images: Illustration by Issiah Davis/Bankrate
Key takeaways
- USDA loans are government-backed mortgages for borrowers buying in specific, eligible rural areas.
- These loans don’t require a down payment, and they have fairly lenient credit score requirements.
- Hoewver, USDA mortgages also come with income and loan limits that vary by location.
What is a USDA loan?
A USDA home loan is a type of government-backed mortgage, available to eligible low- and moderate-income borrowers buying in pre-approved rural areas. Also referred to as rural development or RD loans, they’re part of a national program created by the U.S. Department of Agriculture.
“USDA loans are best for people who want to live in a rural or suburban area but don’t have extra cash saved up for a down payment,” says Jake Vehige, president of mortgage lending at Neighbors Bank in Missouri. “We especially see a lot of first-time buyers benefit from the program, since there’s no down payment requirement and the rates are often really competitive.”
That said, they are also not a very common loan option, so interested borrowers may have to put in more effort than those using conventional or FHA loans. “USDA loans are very much a niche market, and many of the biggest mortgage lenders don’t offer them,” says Bankrate housing market analyst Jeff Ostrowski. “If you’re financing a home in a rural area, you might have to try extra-hard to shop around. But it’s worth the effort.”
Who is eligible for a USDA loan?
USDA loans have very specific requirements. To be eligible, you must:
- Be a U.S. citizen or permanent resident.
- Plan to occupy the home as your primary residence.
- Buy in a rural area designated as eligible by the USDA. The easiest way to find out if a home is in an eligible area is to check the USDA website.
- Meet income requirements. The program is geared toward low- and moderate-income homebuyers, and income limits can vary by family size, metro area and loan program. In more expensive areas, the income ceiling is higher. Check income limits for your county and household size on the USDA website.
- Meet your lender’s credit score requirements. The USDA itself doesn’t impose a minimum credit score, but typically, USDA-approved lenders look for a score of at least 640.
Types of USDA loans
There are three different types of USDA loans, each with different purposes and target borrowers.
| Type of loan | Also known as | Description | Income requirements |
| USDA guaranteed loans | Section 502 Guaranteed | These allow approved mortgage lenders to provide 30-year fixed-rate loans to borrowers in eligible locations. It’s called “guaranteed” because the USDA agrees to reimburse up to 90% of the loan to the lender in the event the borrower defaults. Rates are comparable to conventional loans. | Borrower households must earn no more than 115% of their area’s median income. |
| USDA direct loans | Section 502 Direct | Unlike USDA guaranteed loans, borrowers must apply directly through the USDA’s Rural Development Service Centers, not through a lender. These loans carry a lower interest rate and a long term — up to 38 years for very low-income borrowers. | Direct loans are available only to households with low and very low incomes — you can view income limits here — who are “unable to obtain a loan from other resources,” according to the USDA. There are also limits on how much you can borrow, which can be viewed here. |
| USDA repair loans and grants | Section 504 Home Repair | Intended to help lower-income owners repair and improve their homes; the maximum amount is $40,000. | The program also offers grants to very low-income homeowners aged 62 or older to help remove hazards in their residences; these are capped at $10,000. |
How to apply for a USDA loan
- Check your eligibility. Use the USDA’s property and income eligibility tools to determine if you and the area you want to live in qualify.
- Choose your loan. Decide whether you’ll apply for a guaranteed loan through a private lender or a direct loan through a USDA Rural Development office.
- Submit your application. Provide documentation of your income, assets and debts and undergo a credit check.
- Get preapproved. If you meet the qualifications, you’ll receive a preapproval letter showing how much you can borrow.
- Start your home search. Begin looking for a home located in a USDA-eligible area.
How much does it cost to get a USDA loan?
USDA mortgages come with two standard fees, both of which are charged to the lender, who then usually passes the cost on to the borrower:
- Upfront guarantee fee: The upfront guarantee fee is currently 1% of the loan amount. (For a $100,000 loan, this would be $1,000.) This fee can often be rolled into the mortgage instead of paying it out of pocket.
- Annual fee: The annual fee is 0.35% of the loan amount. A $100,000 mortgage, for example, would have a $350 payment each year for the life of the loan.
These fees keep USDA loans subsidy-neutral, which means that any losses incurred by the program are paid for by these fees instead of taxpayer dollars. Depending on the needs of the program, the fees can change annually.
Along with the USDA fees listed above, you’ll need to cover regular mortgage closing costs — these may include lender fees for loan origination, processing, underwriting, appraisal and more.
How do USDA loans compare to other types of loans?
USDA loans aren’t the only type of mortgage out there. If you’re not eligible for a USDA loan, you might be for an FHA or VA loan, or even a conventional loan. Here’s an overview of some key differences between these types of loans:
| USDA loan | Conventional loan | FHA loan | VA loan | |
|---|---|---|---|---|
| Credit requirements | None, but 640 is standard | 620 | 580 (500 if you put at least 10% down) | None, unless the lender requires it |
| Debt-to-income (DTI) ratio requirements | Up to 41% | Up to 45% | Up to 50% | Up to 41% |
| Minimum down payment | None | 3% (20% to avoid private mortgage insurance) | 3.5% | None |
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