• The United States Department of Agriculture (USDA) offers programs to make homeownership more accessible in rural areas.
  • The USDA Guaranteed Program allows approved lenders to offer favorable terms to qualified borrowers in low- to moderate-income ranges, while the USDA Direct Program issues low-cost loans directly to low-income buyers. 
  • One key benefit of USDA loans is the 0% down payment option for qualified buyers. 

Are you looking to purchase a home in a rural community? Is your household income low-to-moderate for your local market? If so, a USDA loan might be your path to homeownership. Since 1991, the United States Department of Agriculture has made home-buying more accessible for very low- to moderate-income households in rural America through the USDA loan program.[1]

What Is a USDA Loan?

A USDA loan is a mortgage that is either backed by the USDA or offered directly from the USDA to homebuyers.

USDA loans may be used to purchase or repair a modest primary residence in a rural area. USDA loans cannot be used to purchase large or expensive homes or income-producing properties. 

The USDA’s definition of a rural area is generous. Towns with a population of fewer than 35,000 residents may qualify as rural as long as they are not part of a larger metro area.[2] You can view an eligibility map on the USDA website (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do) to see if your area is eligible for individual USDA loan programs.[3]

A key benefit of USDA loans is the 0% down payment option. Qualified borrowers can purchase qualified homes with $0 down.[4]

Note that 0% down buyers may still have to pay closing costs out of pocket. These costs cover fees for necessary professional services such as loan origination, title searches, and escrow. You can use a closing cost calculator to estimate these expenses. In some cases, it may be possible to ask the seller for a concession to cover these costs (up to 6% of the purchase price) or to have them included in the loan amount.[5]

It’s also important to understand the benefits of making a down payment, even if the loan doesn’t require it. A down payment gives you immediate equity in the home, and borrowing less money reduces the interest expense paid over the life of the loan.

Types of USDA Loans

There are three types of USDA home loans: guaranteed loans, direct loans, and housing repair loans.

Guaranteed Loans

USDA Guaranteed loans are home purchase mortgages that are insured by the USDA. The USDA provides a 90% loan note guarantee to approved home loan lenders.[4] This financial protection allows lenders to offer more favorable loan terms to eligible rural homebuyers, such as down payments as low as 0%.

Eligible borrowers can use a USDA Guaranteed loan to purchase, construct, repair, renovate, or relocate their homes. 

USDA Guaranteed loans require an upfront loan guarantee fee equal to 1% of the loan amount. You may be able to roll this fee into the mortgage to avoid paying the amount out-of-pocket. There is also an annual loan guarantee fee of .35% of the loan balance.[6] This fee is typically paid in monthly installments, which are included with the mortgage payment. 

The loan guarantee fees are used to provide mortgage insurance for the USDA so the department can afford to extend the guarantees to the lenders.[7] This type of fee is not unique to USDA loans; most loans that offer low down payments come with some form of mortgage insurance.     

Direct Loans

USDA Direct loans are home purchase mortgages that are offered by the USDA directly to qualifying low-income borrowers. The goal is to provide decent, safe, and sanitary housing to rural residents in need by providing payment assistance. Payment assistance reduces your mortgage payment for a short time through subsidies. When modified by payment assistance, the monthly mortgage payment can be reduced to a low as an effective 1% interest rate, however, the amount of assistance granted is based on adjusted household income.[8]

Program specifics can vary by state, so it’s important to review the information for your state on the USDA website.[9]

Housing Repair Loans

The USDA offers Single Family Housing Repair Loans and Grants to low-income homeowners in rural areas who need financial assistance to complete necessary home repairs. Loans must be repaid over a 20-year term with a fixed 1% interest rate, while grants do not need to be repaid.[10] Loans may be used to "repair, improve, or modernize homes or remove health and safety hazards," while grants can only be used to remove health and safety hazards. Furthermore, grants are reserved for homeowners aged 62 or older.[10]

The housing repair loans and grants are administered by the state-level offices of the USDA (https://www.rd.usda.gov/about-rd/offices/state-offices), so the specifics of the program vary by state. However, one important qualification for USDA home repair loan or grant applicants is that you must be "unable to obtain affordable credit elsewhere."[10]

Eligibility Criteria for USDA Loans

Borrower Criteria

While the USDA sets some borrower eligibility requirements, other requirements are set by individual lenders. This means you may find small differences in borrower criteria from one lender to the next.

  • A qualifying credit score. Even though the USDA does not have a minimum score requirement, it may prove easier to qualify for either USDA loan program with a score of 640 or higher.[8]
  • Employment history. Borrowers should generally have at least two years of stable employment history, either as an employee or as a self-employed worker. However, exceptions may be made in certain cases.[8]
  • Verifiable income. The lender needs to see proof of income in the form of tax returns, pay stubs, or bank statements. As a general guideline, income should be high enough to cover all debts and living expenses. The USDA recommends that a borrower's debts, including the new mortgage, not exceed 41% of their gross income.[8] However, there are also program income limits to consider. For the Guaranteed program, income cannot exceed 115% of the median household income for the area.[5] For the Direct program, income cannot exceed the applicable low-income limit for the area.[8]  For a home repair loan, income cannot exceed the applicable very-low-income limit for the area.[10]
  • Inability to qualify for other home loan options. USDA Guaranteed loans are available to borrowers who cannot qualify for a conventional mortgage with a 20% down payment.[5] USDA Direct loans and home repair loans are reserved for those who cannot qualify for a loan from other resources with terms and conditions that can reasonably be met.[8], [10]
  • Cannot be delinquent on any federal loans. Any other federal loans (such as federal student loans, for example) must be in good standing.[5], [8]
  • Citizenship or legal residency. USDA loans are available to U.S. citizens, U.S. non-citizen nationals, and qualified aliens, as defined by Public Law 104-193.[5], [8]
  • Demonstrable need. Applicants for the Direct program must be without “decent, safe, and sanitary” housing.[8] This requirement does not apply to the Guaranteed program.

Property Requirements

USDA loans are only available for properties that meet certain criteria:[5], [8]

  • Location. The property must be located in an eligible rural area.[3]
  • The property must be a single-family home that serves as a primary residence and does not produce income.
  • Property size and condition. Homes should be modest in size for the area and on lot sizes that are considered common for the area. For home purchase loans, the condition of the home must meet U.S. Housing and Urban Development (HUD) standards.[11] Buyers may be required to hire a licensed home inspector to assess the condition and confirm that it meets HUD standards.

Pros and Cons of USDA Loans

Potential advantages of USDA loans include:

  • 0% down payment option. Qualified buyers can choose to finance the entire purchase and pay $0 toward the down payment.  
  • Lower income requirements. Mortgage lenders use a debt-to-income ratio (DTI) to confirm that income is enough to cover debts and living expenses. While lenders typically prefer to see a DTI below 36%, which means that your debts total less than 36% of your gross income, USDA loans may allow DTIs of 41% or more.[12]

Potential drawbacks of USDA loans include: 

  • Limited buying options. Properties must meet criteria relating to location, property type, size, and condition to qualify for USDA loans.
  • Fees for Guaranteed loans. USDA Guaranteed loans charge an upfront fee of 1% of the loan amount plus an annual fee of .35% of the loan balance.[6]

USDA Loan FAQs

Are USDA Loans For Low-Income Households?

Total adjusted income for the household cannot exceed the moderate level for the area established in the Rural Development Income Limits (https://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do). 

What Is the Interest Rate for a USDA Loan?

Interest rates for USDA Guaranteed loans are set by individual lenders. These rates vary based on factors like location, loan amount, and the borrower’s financials. Interest rates for USDA Direct loans are 4.875%, with rates as low as 1% when modified by payment assistance (as of July 2024).[8]  Interest rates for USDA home repair loans are a fixed 1%.[10]

Do USDA Loans Have Maximum Loan Amounts?

USDA purchase loans don’t specific maximum loan amounts. However, because there are income limits for borrowers, the loan amount is automatically limited to the borrower’s ability to repay the loan without exceeding income maximums. USDA home improvement loans have a $40,000 max, while home improvement grants have a $10,000 max. Eligible home repair applicants can combine these for $50,000 total. [10]

What Is the Maximum Loan Term on a USDA Loan?

USDA Guaranteed loans are only available as a 30-year, fixed-rate mortgage.[13] USDA direct loans can offer loan terms up to 33 years or 38 years for very low-income applicants who cannot afford the 33-year schedule.[8] USDA home repair loans are offered in 20-year terms.[10]

The Bottom Line

USDA loans are a practical path to homeownership for very low- to moderate-income households in rural markets.