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Mortgages

What is a USDA Loan? How They Work & Eligibility Information

Updated May 02, 2023   |   6 mins read
Written by Aly Yale  
Updated May 02, 2023

Buying a new home can be challenging. Fortunately, if you aspire to homeownership in a rural part of the United States, you may be eligible for financial assistance. 

Are you interested in buying a house in a rural area? This guide will break down how the U.S. Department of Agriculture’s Rural Development Loan program can help. We’ll also discuss the pros and cons of USDA home loans and how to qualify.

In this guide:

What is a Rural Development Loan (USDA loan)?

The Rural Development Loan program of the USDA is designed to spur growth and improve the economies of rural areas across the country. It offers homeowners and buyers an affordable, low-interest way to purchase or improve properties in eligible locations.

Pros of USDA loans

  • They require no down payment.
  • You can roll your closing costs into the loan balance.
  • There are no prepayment penalties.
  • They come with low interest rates.

Cons of USDA loans

  • They require mortgage insurance both up front and annually.
  • You must buy in an eligible rural location.
  • You can only go through approved lenders.

How does a USDA loan work?

USDA loans are a type of mortgage offered through the U.S. Department of Agriculture and come in three forms: 

  • Section 502 direct loans: These are issued directly by the USDA. They’re reserved for low-income and moderate-income borrowers. 
  • USDA guaranteed loans: These loans are offered through approved vendors and backed by the USDA. The USDA’s loan guarantee mitigates the risk for the lender to take on otherwise unqualified borrowers. 
  • Section 504 repair loans and grants: These help existing homeowners repair or improve their properties. Assistance goes up to a lifetime total of $27,500, with loan limits of $20,000. 

USDA eligibility

USDA financing is reserved for low- and moderate-income home buyers—often those who are unable to meet eligibility requirements for traditional mortgage products or lack down payment funds.

USDA mortgage loans can only be used for properties in eligible rural parts of the country (detailed below).

USDA home loan requirements

  • You must fall under the income limits for your county. (See Guaranteed income limits, Direct income limits, and Multi-family limits.)
  • A 640 credit score is preferred, though credit requirements vary by loan type, and you may be able to qualify with a lower score.
  • The home you’re purchasing must be located in an eligible area, have adequate utilities, water, and wastewater disposal, and be accessible from a street or road.
  • The property will be your primary residence.
  • Your front-end debt-to-income ratio (housing expenses) can’t exceed 29%, while your back-end DTI (all debt payments) can’t exceed 41%. Higher DTIs may be considered if you have a high credit score.
  • You’ve had no late payments or collections for at least 12 months.

USDA loan programs

There are several loan options under the USDA Rural Development loan program. Each serves a segment of potential buyers: home buyers, businesses, or communities. 

Single Family Housing Guaranteed program

The Single Family Housing Guaranteed loan program will guarantee eligible rural property loans up to 90%. It’s designed to reduce the risk lenders take on when offering no–down payment USDA loans.

Single Family Housing Direct program

The USDA’s Direct loan program is for low-income families who lack decent, safe, or sanitary housing, and are ineligible for other loans. Borrowers can use them to purchase non–income-producing properties of 2,000 square feet or less. The home cannot have an in-ground pool. 

Multi-Family Housing program

The USDA’s Multi-Family program offers financing for borrowers to purchase rental properties that serve low-income, elderly, and disabled renters, and farm labor housing. 

Rural Business program

To simulate the economies of rural regions, the USDA offers various forms of assistance for rural-located businesses. These include loans, grants, investment programs, and more. See the full list of business programs at USDA.gov. 

Water and Environmental Programs

The USDA supports rural infrastructure improvements through its Water and Environmental Programs (WEP). The programs offer assistance to rural communities of 10,000 or fewer people to improve local water and waste removal systems.

Frequently asked questions

Considering a USDA home loan program for your home purchase? Here are some common questions and answers.

Other ways to buy a home affordably

If you’re a first-time or low-income home buyer, the USDA loan program isn’t your only option for purchasing a house. Study up on both national and statewide first-time home buyer programs, as these can reduce your costs considerably.

Also check whether you’re eligible for other government-backed mortgage loans, including FHA loans or loans from approved VA lenders.