Everything You Need to Know About a USDA Loan

Because government-insured loans are typically easier to qualify for and offer more flexibility to the borrower, they are incredibly desirable. One such loan is a USDA loan, which is backed by the United States Department of Agriculture. Here’s what you know about USDA loans, including who does and doesn’t qualify.

What is a USDA Loan?

USDA loans are the only loans on the market that allow you to buy a home without a down payment. You can also usually expect lower mortgage rates on your USDA loan than current market rates. If you can’t afford a conventional loan, you may still be able to obtain a USDA loan.

This loan came about because of the Rural Development Housing Guaranteed Loan program. USDA loans are meant to purchase rural or suburban homes to stimulate economic growth in these areas. Under the USDA loan umbrella are three programs: guaranteed, direct, and home improvement.

Since the US Department of Agriculture guarantees these loans, the USDA will repay the lender if the borrower defaults.

How to Qualify for a USDA Loan

First, to qualify for a USDA loan, you must be a US citizen or a permanent legal resident of the US. That’s across all three loan programs.

Income weighs heavily in USDA loan eligibility. Your income level must fall into the moderate or low end of the income range for your area, and the combined income of the adults in the household cannot be more than 115% of the median local income. You must have a steady job with a monthly income for at least two years and be able to provide tax returns.

Once that is figured, the loan monthly payment cannot exceed 29% of the borrower’s monthly income.

Where you live is another big factor in obtaining a USDA loan. It’s about stimulating growth in rural areas, so you won’t be able to buy a home in a city like Jacksonville or Atlanta. But there is good news. About 97% of land in the United States is in a USDA loan-eligible location, so there’s a good chance you live in a qualifying area.

You’ll usually need fairly good credit for a USDA loan. While the specific credit score requirement may vary by lender, you will usually probably need a FICO score of 640 or more. Debt-to-income ratio requirements will also vary depending on the lender, but you should usually be 41% or less.

Finally, these loans may only be used to purchase a single-unit home that will be your primary residence (not a second property). You may not use a USDA loan to purchase an operating farm.

The Downsides to a USDA Loan

Although some requirements are a little different, and you’ll have better than usual mortgage rates, you can expect a USDA loan to function much like a conventional loan. However, the USDA does require borrowers to have a fixed-rate loan.

The USDA also charges homeowner-paid mortgage insurance premiums (MIP). Still, even these rates are lower than those of a conventional or FHA loan! When you aren’t paying much for mortgage insurance on top of already lower monthly payments, owning a house is a lot less expensive.

You will be limited geographically in where you can buy a home under this loan program. See the USDA eligibility map to see where properties may qualify for a mortgage under this program.

Get Your USDA Loan Questions Answered!

Do you qualify for a USDA loan? If you’re not sure, talk to a local lender. They can make obtaining financing for your dream home easy!

Updated April 2024