What is a USDA loan?

Key points

• USDA loans are primarily for homebuyers with low to moderate income who want to buy a home in an eligible rural or suburban area.
• Depending on your situation, you may qualify for a guaranteed loan through an approved lender or a direct loan from the federal agency.
• USDA loans differ from other loan programs in several ways but can be beneficial to those who qualify.

USDA loans are home loans that are either guaranteed by the U.S. Department of Agriculture (USDA) or issued directly by the federal agency. The USDA also provides loans and grants for home improvement projects.

USDA loans are primarily designed for homebuyers with low to moderate incomes looking to buy a home in an eligible rural area. The loan program has no down payment requirement, and it can be more flexible with your credit history than conventional loans.

How does a USDA loan work?

The USDA loan program offers three different types of loans. Here’s a quick summary of each and other program features to know about.

Loan options

The USDA offers loans for both single-family homes and multi-family housing. Here are the different types of USDA loans you can qualify for:

• Direct loans: These loans are issued directly by the USDA and are designed for rural homebuyers with low and very-low incomes. Repayment terms can be as long as 38 years, and the interest rate is 3.25%, though it can be as low as 1% if you qualify for payment assistance.
• Guaranteed loans: These loans are issued by local lenders and guaranteed by the USDA. You may qualify if you’re a rural home buyer with a low to moderate income. The only repayment option is a 30-year fixed term, and your interest rate will vary based on the lender and your creditworthiness. These loans require an upfront guarantee fee of 1% of the loan amount, as well as an annual guarantee fee of 0.35% of the loan amount.
• Repair loans and grants: The USDA offers direct loans to very low-income homeowners who are looking to improve or modernize their homes. It also provides grants to elderly homeowners with very low incomes to remove health and safety hazards. Loans can be as much as $40,000, while grants max out at $10,000. If you get a loan, you can repay it over 20 years with a 1% interest rate. Grants only need to be repaid if you sell the property less than three years after receiving the funds.

Loan eligibility

Eligibility requirements can vary depending on which type of loan you’re applying for. For starters, homes must be in eligible rural areas, which exclude urban areas but not all suburbs. You can use the USDA eligibility site to determine if the home you’re considering is in an eligible area.

With that said, here’s how the eligibility criteria work for each loan option:

Direct loans

• Have an adjusted income that’s at or below the low-income limit for the area where you’re looking to buy—you can find income limits for your area on the USDA website.
• Be without decent, safe housing.
• Be unable to obtain a loan through other mortgage programs.
• Agree to occupy the property as your primary residence.
• Have the legal capacity to take on a loan.
• Meet citizenship or eligible noncitizen requirements.
• Not be suspended or debarred from participation in federal programs
• The property must be no more than 2,000 square feet, cannot have a market value that exceeds the loan limit for the area and cannot be used for income-producing purposes.
• There may be additional state requirements depending on where you live.
• A credit score of 640 will qualify you for streamlined underwriting, but if your score is under that, the USDA will consider alternative credit sources, such as rent, utilities, insurance and more.

Guaranteed loans

• Have an adjusted income that is 115% or less than the median household income for the area where you’re looking to buy—you can find income limits for your area on the USDA website. 
• Be a U.S. citizen, noncitizen national or qualified alien.
• Agree to occupy the home as your primary residence.
• There is no minimum credit score set by the USDA, but individual lenders may set their own credit score requirements—a common minimum score is 640.

Repair loans and grants

• Be the homeowner and occupy the house.
• Be unable to obtain affordable credit elsewhere.
• Have a household income that does not exceed the very low limit in your county.
• For grants, be age 62 or older and not be able to repay a repair loan—if you can repay part but not all of the costs of a loan, you may be offered a combination of a loan and a grant.
• Loans must be used to repair, improve or modernize homes or remove health and safety hazards.
• Grants must be used to remove health and safety hazards.
• There may be additional state requirements depending on where you live.

Pros and cons of USDA loans

“A USDA loan could be the perfect fit for borrowers who may not have the savings to qualify for other loan programs and are buying in a rural area,” says Lori Beardslee, senior branch manager at Silverton Mortgage, a Georgia-based mortgage lender. 

But as with any home loan program, USDA loans come with both benefits and drawbacks. Here’s what to consider before you apply.

PROS	CONS
No down payment requirement: It can take several years for some prospective homebuyers to come up with enough money for a down payment, and if you have a low income, it may be impossible. Having no down payment requirement makes homeownership more accessible.	Geographic restrictions: You may not qualify for a USDA loan based on the property location. That said, you may be surprised to find some suburban areas included in the eligibility map.
Low interest rates: If you qualify for a direct loan, your interest rate will be lower than the prevailing market rates, and if you qualify for payment assistance, your rate can go as low as 1%. With guaranteed loans, however, your rate will depend on your creditworthiness.	Income limits: Unless your income is low enough to meet the eligibility requirements, you won’t qualify for a USDA loan, even if you’re buying a home in an eligible area.
Available for low-income homebuyers: You don’t need a high income to take advantage of this loan program. In fact, the USDA’s direct loan program can make payments more affordable through lower interest rates and extended repayment terms.	Guarantee fee: For guaranteed loans, you’re required to pay the upfront and ongoing guarantee fee, even if you make a large down payment. There’s also no way to have the guarantee fee removed from your loan like you can with private mortgage insurance on a conventional loan.

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USDA vs. other home loans

It’s a good idea to compare multiple home loan options before settling on a certain program. Here’s a quick summary of how USDA loans differ from other popular mortgage programs:

FEATURE	USDA LOANS	FHA LOANS	VA LOANS	CONVENTIONAL LOANS
Designed for:	Rural homebuyers with low to moderate income	Homebuyers with low to moderate income and lower credit scores	Eligible members of the military community	Any homebuyer who qualifies
Down payment requirement:	None	3.5% with a credit score of 580 or above, 10% with a credit score of 500 to 579	None	Generally 3%, but there are first-time homebuyer programs with no down payment
Income limits:	Yes	No	No	Generally no
Property restrictions:	Yes	Yes	Yes	Generally no
Minimum credit score:	Generally 640, but can go lower with direct loans	500	Between 580 and 660, depending on the lender	620
Mortgage insurance:	1% upfront fee, 0.35% annual fee; can’t get rid of it	1.75% upfront premium, up to 0.95% annual premium; may be able to get rid of it	Up to 3.6% upfront funding fee, no annual fee	Up to 1% annual fee; can get rid of it

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With so many options, it can be tough to know which is the right fit for you. “It is always a good idea to talk to a trusted mortgage professional who is willing to review your specific circumstances and walk you through all of the options,” says Beardslee.

Frequently asked questions (FAQs)