What is a USDA Loan? How They Work & Eligibility Information
USDA home loans can be a great option if you want to buy a house in a rural part of the United States. With low rates, no down payment, and the option to finance your closing costs, they can lower your home buying expenses considerably.
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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)?
- How does a USDA loan work?
- USDA eligibility
- USDA loan programs
- Frequently asked questions
- Other ways to buy a home affordably
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 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 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
- Single Family Housing Direct program
- Multi-Family Housing program
- Rural Business program
- Water and Environmental Programs
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.
USDA rural development loans require an FHA mortgage insurance premium upfront (1% of the loan balance) and annually (0.35% of the loan balance.) The annual fee is divided and spread across monthly mortgage payments.
You can check your property eligibility through USDA.gov. Click on the USDA program you’re considering, and select the “Property Eligibility” tab. Once you accept the disclaimer, you can enter any U.S. address to determine eligibility.
USDA loans typically require zero down payment. If you prefer to make a down payment, it could lower your mortgage balance and therefore lower your monthly payment and the interest you pay over time.
Both first-time and repeat home buyers and homeowners can use a rural development loan. It is not limited to just first-timers.
Mortgage rates on USDA Direct loans can be significantly lower than rates offered on conventional mortgage loans. On USDA Guaranteed loans, your rate will depend on your credit score, DTI, and the property you’re purchasing.
To compare your options, shop around and request quotes from a few of the best mortgage lenders.
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.