What is a USDA loan? Short answer: USDA offers one of the most popular government-backed mortgage programs, which allows qualified buyers in rural and some suburban areas to buy a home with no down payment, making it one of the most affordable paths to homeownership.
Backed by the U.S. Department of Agriculture, a USDA mortgage loan is specifically for low- and moderate-income families who may not otherwise qualify for conventional mortgages. The USDA offers two main programs: the guaranteed loan program and the direct home loan. This article focuses on the guaranteed loan program, which is by far the most popular option.
If you’re wondering how it works, and whether you qualify, this guide covers everything from the requirements to the pros and cons plus alternatives.
At a glance: USDA loan requirements (2025)
- Status: U.S. citizen or permanent resident
- Credit score: 640+
- Income limits: Household income must not exceed 115% of the median income for the area
- Debt-to-income ratio (DTI): Typically 41%, but some lenders allow high ratios with compensating factors
- Occupancy: Must be your primary residence
- Property type: Single-family homes, townhouses, and eligible manufactured homes
- Location: Must be in a USDA-eligible rural or suburban area[1]
What is a USDA loan and how does it work?
A USDA loan is a mortgage insured by the U.S. Department of Agriculture that allows low- and moderate-income home buyers to finance a property in eligible rural or suburban areas. The loans are typically 30-year fixed-rate mortgages, which means your monthly payments remain consistent over time.
Because the federal government backs USDA loans, lenders are more willing to accept lower credit scores and offer lower interest rates than they would with conventional mortgages.
There are three main types of USDA loan programs:
- Guaranteed Loan Program: Loans issued by approved lenders with USDA backing
- Direct Loan Program: Funded directly by the USDA for very low-income borrowers who want to buy, build, or fix up a home in a rural area
- USDA Home Improvement Loans & Grants: Programs for existing homeowners to finance repairs or upgrades that improve safety and livability
The zero-down-payment requirement stands out as the biggest benefit of USDA loans, making it an attractive financing option for home buyers with smaller or no savings.
So, how do USDA loans work? Here’s the USDA loan process:
- Prequalification: Contact a USDA-approved lender to see how much you can afford.
- Eligibility check: Confirm income and property location requirements.
- Application: Submit your mortgage application with required documentation.
- Underwriting: The lender reviews your finances and orders a property appraisal.
- Closing: Finalize the paperwork and get your USDA home loan.
USDA loan requirements
How do you qualify for a USDA loan? First, you must meet certain minimum requirements. While the USDA sets national guidelines, lenders may add their own standards, known as overlays. Here’s a closer look at the USDA loan requirements to help you determine if you qualify before you begin house hunting.
Credit score
Most USDA-approved lenders require a minimum credit score of 640. If your score falls below 640, you may still qualify through manual underwriting. During the underwriting, lenders will require extra documentation to ensure that you can handle monthly payments.
For example, if your credit score is 600 and you haven’t missed payments over the past year and have steady income, lenders may still approve you if you have strong compensating factors, such as large cash reserves.
Income limits
Since USDA loans are for low- and moderate-income households, your income cannot exceed 115% of the area median income (AMI). USDA loan income limits vary by location. For instance, in Apache County, Arizona, the 2025 income limit for a family of four is $119,850 for a guaranteed loan. To find out income limits in your area, use this USDA tool.
Debt-to-income ratio
The USDA requires your monthly debt, including future mortgage payments, not to exceed 41%. However, you may qualify with ratios up to 44-46% if you have compensating factors such as larger cash reserves, a higher credit score, and a stable employment history.
Occupancy and property type
The USDA loan program can only finance primary residences, so you cannot use it to buy investment properties, vacation homes, or second homes. Eligible properties include single-family houses, townhomes, and certain manufactured homes that meet safety and quality standards.
Location eligibility
The property must be located in a USDA-eligible rural or suburban area. Many people assume that this limits the loan to remote farmlands alone, but many suburban communities qualify. Use the USDA eligibility map to see whether the location you want qualifies.
Required documentation
Like other mortgage programs, lenders require documentation to verify your identity, income, and employment history. In most cases, you’ll need to provide:
- Your government-issued ID
- Proof of income (pay stubs or tax returns if you’re self-employed).
- Bank statements
- Employment verification
USDA loan requirement checklist
| Requirement | Standard guideline |
| Credit score | 640+ |
| Income limits | ≤115% of AMI |
| Debt-to-income ratio | Maximum 41% |
| Occupancy | Primary residence |
| Property type | Single-family homes, townhouses, certain manufactured homes |
| Location | USDA-eligible area |
USDA loan interest rates
What is the interest rate on a USDA loan? USDA loans often offer lower interest rates than conventional mortgages and FHA loans due to the government backing, which reduces lender risk.
However, your USDA loan rate will depend on your credit score, DTI, the lender you work with, and market conditions. That's why it’s smart to shop around and compare offers from multiple USDA-approved lenders.
Pros and cons of USDA loans
Like any other type of mortgage, USDA loans have upsides and downsides. Knowing them can help you decide whether this program is right for you.
Pros
- Zero down payment required: This is one of the major advantages of a USDA mortgage loan. You can finance a home purchase without needing to save tens of thousands upfront.
- Lower interest rates: Because USDA loans are backed by the federal government, lenders can offer lower rates than those offered by conventional mortgages.
- Lower monthly mortgage insurance: USDA loans don’t have private mortgage insurance (PMI), but they include two insurance fees, which are often lower than PMI: An upfront guarantee fee (1% of the loan amount, which can often be rolled into the loan), and a 0.35% annual fee added to monthly payments.
- Flexible credit score requirements: While most lenders prefer a credit score of at least 640, those with lower scores may still qualify through manual underwriting.
- No prepayment penalty: Some loan types charge a fee if you pay off your loan early. But with USDA loans, there’s no prepayment penalty.
Cons
- Location restrictions: The property must be in an eligible rural or suburban area to qualify.
- Income limits: Your household income cannot exceed 115% of the area median income (AMI).
- Upfront and annual fees: USDA loans charge an upfront guarantee and annual fee (paid monthly).
- Longer processing times: Lenders need to verify several things in your application, resulting in a longer underwriting timeline compared to other mortgages.
USDA loan process
The USDA mortgage loan process is straightforward but often takes longer than conventional and FHA loans. Here are the steps to apply for a USDA home loan.
Prequalification
During prequalification, a USDA-approved lender will ask you questions regarding your income, assets, debt, and credit. Using the information you share, they’ll provide an estimate of how much you may qualify to borrow.
Eligibility check
Before you submit your application, you need to confirm if you meet all the USDA loan minimum requirements. This includes a credit score of 640 or higher, a DTI not exceeding 41%, income limits, and the property must be located in a USDA-eligible area.
Application
Once you confirm your eligibility, the next step is to submit your application and provide the required documentation. Most lenders require pay stubs, W-2s, tax returns (if self-employed), bank statements, and proof of employment. You’ll also give permission for a credit check so the lender can evaluate your credit history and score.
Underwriting
Your application moves to underwriting, where the lender will take a closer look at your debt-to-income ratio, employment stability, and payment history. The lender will also order an appraisal to ensure that the property meets USDA standards.
Close on the loan
If approved, you’ll proceed to closing, where you’ll sign the paperwork and officially secure your USDA mortgage loan.
Alternatives to USDA loans
While USDA loans provide the easiest path to homeownership, they’re not perfect for everyone. If USDA loans don't fit your situation, consider these alternatives:
- FHA loan: Requires a 3.5% down payment with credit scores as low as 580. No geographic restrictions, but have mortgage insurance premiums over the life of the loan.
- VA loan: Available to eligible veterans, service members, and surviving spouses. VA loans have zero down payment and no geographic restrictions. No mortgage insurance required, but funding fees apply.
- Conventional 97: Requires a 3% down payment and a credit score of 620 or higher. Conventional 97 loans also require you to pay private mortgage insurance if you put less than 20% down.
| Loan type | Minimum credit score | Down payment | Mortgage insurance | Income limits |
| USDA | 640 | Zero | No PMI, but upfront guarantee and annual fees apply | ≤115% of AMI |
| FHA | 580 | 3.5% if your credit score is 580 or higher | Yes | None |
| VA | Zero | No, but require a VA funding fee | None | |
| Conventional 97 | 620 | 3% | Yes | None |
The bottom line on USDA loans
USDA loans offer an excellent path to homeownership for millions of Americans willing to live in rural or suburban areas. The zero down payment requirement, competitive interest rates, and flexible credit make it an attractive option for low- and moderate-income families.
However, before house hunting, check the USDA’s online eligibility tools for income and property requirements. And when possible, connect with a real estate agent and lender experienced in USDA loans to make the process smoother.
Need to find an agent? Clever's network includes experts who have helped hundreds of buyers like you with USDA loans. Take a short quiz to find agents in your area now!
FAQ
What credit score is needed for a USDA loan?
Lenders prefer a credit score of 640 or higher, but borrowers with lower scores may still qualify with manual underwriting.
What is the interest rate on a USDA loan?
USDA loan rates are usually lower than FHA and conventional loan rates because they’re backed by the government, which lowers lender risk. The exact rate you receive depends on your credit score, financial profile, and lender.
How do you qualify for a USDA loan?
To qualify for a USDA home loan, you need to meet certain minimum requirements:
- Income: Your household income must be at or below 115% of your area’s median income.
- Property location: The home must be located in a USDA-eligible rural or suburban area.
- Occupancy: The home must be your primary residence.
- Employment & stability: Lenders typically want a two-year work history and proof of stable income.
- Credit and DTI: A credit score of at least 640 and a manageable DTI ratio, less than 41%, though higher may be accepted with strong compensating factors.
How much are the USDA loan closing costs?
Closing costs range from 2% to 6% of the loan amount, like FHA or conventional loans. These costs may include lender fees, appraisal, title insurance, and escrow. The good news is that USDA allows you to roll some closing costs into the loan or cover them with seller concessions.
Are USDA loans a good idea?
Yes. USDA loans are one of the most affordable paths to homeownership. You can buy a home with no down payment, enjoy low interest rates, and benefit from reduced monthly mortgage insurance. The main drawback is that you’re limited to certain areas and income caps.
Can you be denied a USDA loan?
eYes. Common reasons include household income exceeding USDA limits, property not located in an eligible area, poor credit, and high debt-to-income ratio.
Is USDA better than FHA?
If you qualify, a USDA loan can be a better option than an FHA because of the zero down payment requirement and lower mortgage insurance. However, an FHA loan may be the better choice if your income is too high for USDA limits or the property you want is not in a USDA-approved area.