What Is a USDA Loan? Am I Eligible for One?

USDA loans are zero-down-payment mortgages that can open paths to homeownership for rural and suburban home buyers.
Taylor Getler
By Taylor Getler 
Updated
Edited by Alice Holbrook Reviewed by Michelle Blackford
2019-home-buyer-report

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A USDA home loan is a zero-down-payment mortgage for home buyers in eligible towns and rural areas. USDA loans are guaranteed by the USDA Rural Development Guaranteed Housing Loan Program, a part of the U.S. Department of Agriculture. Most USDA loans are issued by partner lenders, though the department can grant them directly to qualified borrowers with incomes below a certain limit.

In addition to having no down payment requirements, USDA home loans often also have lower rates than conventional mortgages because the government is taking on the risks associated with lending. This is true even when the USDA issues the loans. For example, on Jan. 1, 2024, the government agency set the interest rate for mortgages issued directly by the USDA at 5.125%. By comparison, the average interest rate for a conventional 30-year mortgage was about 6.3% that day.

And USDA loans don’t require borrowers to pay for traditional private mortgage insurance, or PMI. 

USDA loans can be a great tool to unlock homeownership for qualified borrowers. However, buyers have to meet certain requirements, including purchasing property within specific areas outlined by the agency. 

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Types of USDA loans

There are three USDA home loan programs:

Loan guarantees: The USDA guarantees a mortgage issued by a participating local lender, allowing borrowers to qualify for low mortgage interest rates without a down payment.  While borrowers don’t have to pay for PMI, they will have to pay an upfront fee of 1% and an annual fee of 0.35% of the loan balance, which is amortized across monthly payments. This typically costs less than traditional PMI.

Direct loans: Issued by the USDA, these mortgages are for low- and very low-income applicants who are without safe housing or can’t access a traditional home loan. Income thresholds vary by region. With subsidies, interest rates can be as low as 1%. These loans also offer terms of up to 38 years.

The USDA usually issues direct loans for homes with a market value below the area loan limit. Again, that’s a moving target depending on where you live. The limit can be $700,000 or more in pricey real estate markets like California and Hawaii, though most rural areas have loan limits closer to $330,000.

Home improvement loans and grants: These loans or outright financial awards permit homeowners to repair or upgrade their homes. Loans are capped at $40,000, while grants have a maximum of $10,000.  Packages can also combine a loan and a grant, providing up to $50,000 in total assistance. Loan terms are for 20 years with a 1% interest rate. If the borrower sells the home within three years, they’ll have to repay any grant money.

Qualifying for a USDA-guaranteed mortgage

Income limits to qualify for a USDA-guaranteed home loan issued by a partner lender vary by location and household size. But the borrower’s household income cannot exceed 115% of the median income in the county where their new house is located. To find the income limit for the county where you live, consult this USDA map and table.

USDA-guaranteed home loans can fund only owner-occupied primary residences. Borrowers must also:

  • Be a U.S. citizen or permanent resident.

  • Have a proven history of dependable income.

  • Have a credit history that demonstrates a reliable ability to repay debts, and a score of at least 640 to qualify for streamlined processing. Borrowers without credit history can be evaluated through alternative criteria. 

The monthly payment on the loan — including principal, interest, insurance and taxes — must be 29% or less of the borrower’s monthly income. Other monthly debt payments cannot exceed 41% of the borrower’s income.

Qualifying for a Single Family Housing Direct Home Loan

The USDA also directly issues loans to certain low-income borrowers. To qualify for a Single Family Housing Direct Home Loan, borrowers must:

  • Meet income limits, which are designated by county and metro area. Limits can be found here.

  • Currently be without “decent, safe, and sanitary” housing.

  • Be unable to meet the qualifications necessary to obtain another kind of mortgage.

  • Be a U.S. citizen or eligible noncitizen. 

Borrowers who have been prohibited from federal programs won’t be eligible for a Single Family Housing Direct Home Loan, and this mortgage can’t be used to finance a property that is valued above the area’s loan limit. 

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Ways to get the best USDA mortgage rates

When you’re shopping for a USDA loan, it’s smart to make sure your financials are in as good a shape as possible. This means pulling your credit reports from the three main credit reporting agencies — Experian, Equifax and TransUnion — and addressing any errors you find. You might also pay down any larger balances, which has the added benefit of improving your debt-to-income ratio. USDA loans might have more lenient requirements than some other loan types, but having a better credit score and DTI will likely net you a better rate.

USDA loans are notable for not requiring a down payment, but if you’re able to make one, you’ll look like a safer candidate to lenders. This is also likely to get you lower rate offers.

Once you’re feeling confident about your application, compare mortgage rates between at least three USDA lenders. Even small differences in the rate you pay could save you — or cost you — thousands of dollars over the term of a home loan. And while you’re comparing lenders, look into first-time home buyer programs offered by your state’s housing authority. Many of these nonprofit agencies offer down payment and closing cost assistance in the form of grants.

Frequently asked questions

Borrowers who meet the USDA’s minimum criteria and who want to live in an approved area may find that a USDA loan is their best path to homeownership. Alternatively, qualified borrowers may also explore FHA loans, or proprietary loan programs from lenders that specialize in working with low-income borrowers.

While USDA loans can be great choices for qualified borrowers, others may feel restricted in their home search by geographic and price limitations. Income limits may also box out borrowers who would otherwise be interested in a USDA loan.

To apply for a USDA-backed loan, talk to a participating lender. If you’re interested in a USDA direct mortgage or home improvement loan or grant, contact your state’s USDA office.

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