What Is a USDA Loan?

Written by Aja McClanahanAugust 2nd, 20225 minute read

Summary | How USDA loans work | Is a USDA loan right for you? | Loan qualifications and eligibility | FAQs

Many government-backed loan products promote homeownership among as many Americans as possible — including low- to moderate-income home buyers. The U.S. Department of Agriculture (USDA) backs zero-down payment mortgages for eligible home buyers purchasing properties in rural areas.

Some USDA loan programs also cover home construction or affordable housing. However, this guide will focus on the Single Family Housing Guaranteed Loan Program, which aims to support home buyers purchasing single-family homes.

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At a glance: USDA loan requirements (2022)

  • Status: U.S. citizen or permanent resident
  • Credit score: 640+
  • Income: ≤115% of the area median income
  • Debt-to-income ratio (DTI): 41%
  • Occupancy: primary residence must be in a USDA-eligible zone

Learn more about USDA loan qualifications and eligibility.

Although the USDA sets state lending guidelines, many USDA-approved lenders will have their own requirements, known as lender overlays.

How USDA loans work

USDA loans, often known as rural development home loans, are 100% financed, 30-year fixed-rate mortgages designed for low- to moderate-income home purchasers.

The USDA doesn't typically lend money to home buyers directly, but rather offers approved lenders default insurance as an incentive to lend money to home buyers who don't qualify for a conventional mortgage.

Interest rates

Interest rates on USDA loans can be slightly lower than conventional loans because they present less risk for the lender since the U.S. government backs them. However, if you’ve got a lower credit score, your interest rate could be higher if you are perceived as a higher credit risk.

What does 'rural' mean?

Up to 97% of U.S. land is eligible for USDA home loans, with many located just outside suburban areas.

Is a USDA loan right for you?

USDA loans can be a great way to jump-start your path to homeownership, but it’s not the best loan product for every situation — even if you do meet all the requirements.

If you're a "prime borrower" (e.g., you can make a larger down payment, have a higher credit score, or have a lower DTI ratio) you'd likely get a less expensive loan product with a conventional mortgage.

✅ USDA loans are ideal for borrowers who:
❌ USDA loans are not ideal for borrowers who can qualify for:
Might not otherwise qualify for a conventional mortgage loan
A conventional mortgage, which may offer better terms that reduce the total cost of the mortgage
Can afford an additional up-front guarantee fee (1%)
A lower-cost loan because of good financial health

If you're a subprime borrower but still don't qualify for a USDA loan, taking steps to improve your financial data could be worthwhile — and help you become a homeowner sooner than later.

Is a USDA construction loan right for you?
</p><p>If you can't find a home that meets your needs, USDA-backed loans have another variation that can help you with the cost of building a new home.</p><p>The main difference is that the loan starts off as financing for the construction loan and is then converted into a 30-year fixed-rate loan when construction is finished.</p><p>

</p><h4>USDA vs. conventional loans</h4><p>Conventional loans (those not insured or guaranteed by the U.S. government) have stricter loan requirements. For example, you need to make a down payment of 20%, or else pay mortgage insurance.</p><p>However, conventional loans don’t restrict your purchase to a certain area or property type — you can live anywhere you like, in any kind of home.</p><p><strong>» MORE:</strong> <a href="https://anytimeestimate.com/mortgage/conventional-loan-requirements/" rel="noopener noreferrer" target="_blank">Conventional loan eligibility requirements</a></p><h4>USDA vs. FHA loans</h4><p>FHA loans (backed by the Federal Housing Administration) offer buyers with lower credit scores and down payments the opportunity to become homeowners. In fact, you can get a mortgage with a credit score as low as 500–580.</p><p>FHA loans do have an up-front funding fee and require borrowers to pay a mortgage insurance premium (MIP) for the life of the loan. FHA loans require a minimum of 3.5% down or more if you’ve got a lower credit score.</p><p><strong>» MORE:</strong> <a href="https://anytimeestimate.com/fha-loans/fha-loan-qualifications/" rel="noopener noreferrer" target="_blank">FHA loan eligibility requirements</a></p><h4>USDA vs. VA loans</h4><p>Like USDA loans, VA loans offer a government-backed, no-down payment mortgage product. VA loans are insured by the Department of Veterans Affairs and designed for active-duty service members, veterans, and surviving spouses.</p><p>VA home buyers must pay an up-front 1.25–3.3% funding fee, but not mortgage insurance.</p><p><strong>» MORE:</strong> <a href="https://anytimeestimate.com/va-mortgage/va-loan-requirements/" rel="noopener noreferrer" target="_blank">VA loan eligibility requirements</a></p><p>

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USDA loan qualifications and eligibility: In-depth breakdown

USDA mortgages include income restrictions, and the home must be situated in a specified rural area. Even if you don’t quite meet all the loan requirements, you may still qualify with the help of a co-signer or co-borrower.

Loan requirements 👇

Down payment

There are no down payment requirements for USDA-backed loans. However, if your property appraises for less than your approved loan amount, you may have to come out of pocket for the difference. This amount would be included in your loan closing costs.

Credit score

Generally, USDA-approved lenders want you to have a credit score of 640 or more. However, each lender has its own requirements for USDA loans, so you could still be approved with a higher or lower credit score.

Income limits

Your gross monthly income must be equal to or less than 115% of the area median income for the county you'll be living in. You'll need to show proof of a 24-month work history or dependable income.

Debt-to-income ratio

No more than 41% of your gross monthly income can go toward debt payments, such as mortgage or car loan. So if you earn $1,000 per month, your total debts (including your housing expenses) can't exceed $410.

Property requirements

USDA-backed loans are only for homes in targeted zones, which can be rural or suburban areas. Enter the address of the property you’re considering on the USDA map to make sure it’s in an eligible area.
Note: American Samoa, Guam, Northern Mariana Islands, and Puerto Rico are USDA-eligible zones. Washington, DC, is not eligible.
The property must be a single-family home (including townhouse, condo, detached unit, or manufactured). You must also be buying your primary residence — not an investment or house-flipping project.

Loan limits (2022)

Most USDA-eligible counties cap the amount they'll lend at $336,500 — though some will lend as much as $776,600. You can purchase a home that exceeds these loan amounts, but you'd have to cover the difference yourself.

» FIND: Maximum amounts for USDA loans by county

Documentation

  • Current government-issued ID
  • Credit report and score
  • Proof of a Social Security number
  • Pay stubs (past 30–90 days)
  • Income tax returns (past 2 years)
  • W-2s, 1099s, or any other proof of income (past 2 years)
  • Bank statements (past 60 days)
  • A letter explaining any large deposits in your bank accounts or gift funds that may be used in the transaction

Fees

As you create your budget, know that your USDA loan comes with two fees:

  • Up-front guarantee fee (1% of initial loan amount), which is typically paid in full at closing and operates much like a mortgage insurance premium or private mortgage insurance
  • Annual fee (.035% of current loan amount), which is typically built into your monthly payments

On a $330,000 mortgage, you'd pay a guaranteed fee of $3,000 right away and an annual fee of $115.50 for the first year of your loan.

Use our USDA loan calculator to determine your guarantee fee based on your loan amount.

Next steps: Applying for a USDA loan

Reach out to a USDA-approved lender to start your application for the Single Family Housing Guaranteed Loan Program. Ideally, you'll have already found an eligible property you like and started gathering the required documentation needed to underwrite your loan.

A local real estate agent can connect you with a knowledgeable, trusted loan officer or mortgage broker who's familiar with the requirements for the loan you’re considering.

FAQs

</p><p>Your income cannot exceed 115% of the typical local household income, which varies by county nationwide. <a href="#in-depth" onclick="globalTOCClick('#in-depth');" data-link-type="jump-link">Learn more about USDA income and loan limits</a>.

</p><p>U.S. applicants must have a two-year work history, reasonably good credit, and meet local income limits. In addition, the house you're buying must be in an eligible area, and you must live in that home as your main residence. <a href="#in-depth" onclick="globalTOCClick('#in-depth');" data-link-type="jump-link">Learn more about USDA loan requirements</a>.

</p><p>Like with any other home mortgage, your loan application could be denied for poor credit, inadequate cash savings, spotty employment history, or a property that doesn't meet the guidelines. However, if you don’t quite meet all the <a href="#in-depth" onclick="globalTOCClick('#in-depth');" data-link-type="jump-link">loan requirements</a>, you may still qualify with the help of a co-signer or co-borrower.

</p><p>You need a FICO credit score of at least 640 for a USDA loan, though it's possible to have a lower score and still be approved if you meet other requirements or have a co-signer. <a href="#in-depth" onclick="globalTOCClick('#in-depth');" data-link-type="jump-link">Learn more about USDA loan requirements</a>.

</p><p>USDA loans take the same amount of time to process as any other home loan. A well-prepared borrower and a house that has no appraisal issues can close within 30 days. However, allow 60 days to process the loan to be on the safe side. Be prepared and make sure you have the right <a href="#documentation" onclick="globalTOCClick('#documentation');" data-link-type="jump-link">documentation</a>.

</p><p>Closing costs vary from state to state. Generally speaking, the closing costs on a USDA loan are about the same as on any other mortgage, though the specific rates vary from state to state. <a href="https://anytimeestimate.com/loan-programs/usda-loan_calculator.htm" rel="noopener noreferrer" target="_blank">Calculate your USDA loan payment</a>.