Most home buyers fund their new home purchases with a mortgage. If you live in an eligible town or rural area, you might consider a USDA loan.
With no down payments and lower rates, USDA loans can be an attractive way for low-income buyers to achieve homeownership. But you must meet certain requirements to qualify, and you’re limited to purchasing property in a specific area.
Let’s explore what a USDA loan is, how to qualify and apply, and whether it’s right for you.
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What is a USDA loan?
This is a home loan that’s backed by the US Department of Agriculture’s Rural Development Guaranteed Housing Loan Program. It’s one of several first-time home buyer programs for those who don’t qualify for conventional loans.
A USDA loan is aimed at low-income home buyers in eligible towns and rural areas.[1] It doesn't require a down payment or private mortgage insurance (PMI), and it has lower interest rates than conventional mortgages because the government takes on the risks associated with lending. You can get a USDA loan directly from the USDA or from a partner lender.
Types of USDA loans and how to qualify
A recent home buyer survey by Clever Real Estate found that 27% of first-time buyers struggle to pay their mortgage on time, so it’s essential to choose your loan wisely. This involves understanding the interest rate, repayment terms, and down payment requirements.
The USDA offers two types of loans: the Section 502 Guaranteed USDA Loan and the Section 502 Direct USDA Loan. Both loans are for low-income borrowers who don’t qualify for conventional loans to purchase or renovate housing.
| Loan type | Guaranteed USDA loan | Direct USDA loan |
|---|---|---|
| Interest rate | Set by lender | 1%-5% (subject to change) |
| Loan term | 30 years | 33 years-38 years |
| Down payment | None | None |
| Income limits | Up to 115% of AMI | Up to 80% of AMI |
| Credit score | No minimum | 620 |
| Fees | 1% up front + 0.35% annually | None |
Neither USDA loan requires a down payment. However, applicants whose assets are higher than the loan’s minimum limits may have to put down a portion of those assets.
Loan limits vary by location.[2] For instance, in Los Angeles County, the loan limit is $967,800. The lowest loan limit nationwide is $419,300.
Both types of loans place limits on the borrower’s income as well.
» Find your county’s income limit .
A USDA loan is a no-PMI mortgage program: you won’t have to pay private mortgage insurance (typically 0.1%–2.0% annually), which could save you $10–$500 or more on your monthly payments.
The USDA also offers renovation loans. These help low-income families and individuals buy and repair older homes in rural areas that the USDA owns. Through this program, you can borrow 100% of the house’s purchase price plus 2% of its value for repairs.
To qualify for a USDA renovation loan:
- The home must be in a rural area.
- You must earn below 50% of the area’s median income (AMI).
- You must be ineligible for alternative forms of financing.
- The property must be repaired.
- The property must be a home (versus a farm or other income-generating property).
- You must occupy the house.
How to apply for a USDA loan
Before you apply for a USDA loan, check the income limits for your county and be sure your property is in an eligible rural area. Add the eligible locations to your home-buying checklist to ensure you only look at properties that qualify.
Not all lenders offer USDA loans. You can search a list of active lenders on the USDA’s website to find one offering the Guaranteed Loan Program.[3]
To apply for a Direct Loan, visit your local USDA office. On the USDA site, select your state to find an address and contact information.[4]
Is a USDA loan right for you?
A USDA loan can help low-income buyers in rural areas achieve homeownership. These loans are attractive for several reasons, but there are downsides, too.
Pros
- No down payment
- No loan limit for guaranteed loans
- Low, fixed interest rates on direct loans
- Potential for seller to pay closing costs
- Flexibility to purchase or refinance a home
Cons
- Limitations on areas where to buy property
- No flexibility on primary residence
- Income limits
- Up-front and annual fees
- Direct loan size limits
USDA loan alternatives
USDA loans aren’t for everyone. In fact, 14% of recent home buyers said they’d shop around for better interest rates, and 8% said they’d spend more time comparing financing options.
To avoid their same regrets, consider these other loans and programs:
FHA loan
Like a USDA loan, an FHA loan is backed by the government and issued by private lenders. It tends to have more flexible requirements and is aimed at homeowners who may not be able to get a conventional loan.
It requires a minimum credit score of 580 (with 3.5% down) or 500 (with 10% down), and your debt-to-income (DTI) ratio can range from 43% to 50%. FHA loans also require you to pay mortgage insurance premiums (MIPs): 1.75% of the loan amount up front, plus an annual premium of 0.15–0.75%.
VA loan
The US Department of Veterans Affairs issues loans for active military members, veterans, and surviving spouses. They’re backed by the government but issued through private lenders.
There’s no minimum down payment, and interest rates are typically lower than other loan types. The credit guidelines are more flexible, too, and tend to be lower than those of competitors. The VA also limits the amount of closing costs buyers can pay and caps seller concessions at 4% of the total loan price.
Conventional loan
A conventional loan is the most common loan type. It isn't backed by the government and can be issued by banks, credit unions, savings and loan institutions, or online mortgage lenders.
Conventional loans require a 620 credit score with a DTI ratio of 45–50%. The minimum down payment is 3% for a fixed-rate loan and 5% for an adjustable-rate loan. If you put less than 20% down, you’ll have to pay PMI, which adds to your monthly costs until you reach 20% equity.
Financing options to build a home
First-time home buyers and those with low or very low income can also look into grants and other funding option to build or repair a home. Some examples include:
- Fannie Mae HomeStyle Renovation: Finance up to 75% of the home’s after-renovation value.
- VA housing grants for disabled veterans: Receive $7,910–$109,986, depending on the type of disability and housing.
- Habitat for Humanity–funded home: Mortgage payments are typically capped at 30% of the applicant's gross monthly income.
- Fannie Mae HomePath: Get up to 3% closing cost assistance or up to $2,500 in down payment assistance.
- FHA Revitalization Area sales programs: Home prices in HUD-designated geographic areas are steeply discounted, up to 50% of the listing price.
Final thoughts: USDA loans are helpful but not flexible
While a USDA loan can help make homeownership possible for low-income buyers, there are limits on how much money you can save and the location of the house. It’s a good option to make homeownership more achievable for some, but it’s not a very flexible loan. Always explore all your loan options before committing to a specific type.
If you need help, a real estate agent can guide you through this process. Clever Real Estate can match you with a knowledgeable and experienced local realtor. You can even earn cash back after closing if you buy in a qualifying state.