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What is a USDA Loan and How Do I Qualify for One?
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USDA loans can help you with buying or improving a home in a rural area with no down payment. The U.S. Department of Agriculture offers several programs to help low- to moderate-income borrowers, but there are strict income and geographic eligibility requirements to qualify.
What is a USDA loan?
A USDA loan is a mortgage for low- to moderate-income families in need of safe and sanitary housing in rural areas. The program offers two types of zero down payment loan options: USDA guaranteed loan and USDA direct loan.
USDA vs. FHA loans
Unlike USDA loans, FHA loans require a down payment, typically 3.5% or more. However, FHA loans don’t have strict income and geographic restrictions to qualify. Below is the breakdown of the difference between the two loan programs.
|Loan requirement||USDA loans||FHA loans|
|Minimum credit score||640, but alternative credit such as rent or utility bill can be used if there isn't enough credit to obtain a credit score|| |
580 with a 3.5% down payment
500-570 with a 10% down payment
|Mortgage insurance/guarantee fees||1% guarantee fee 0.35% of loan amount for annual guarantee fee|| |
1.75% upfront premium
0.45% to 1.05% annual premium
|Income limits||Up to moderate household income limit based on area||No income limits|
|Property location limits||Rural areas designated by the USDA||No restrictions|
USDA vs. conventional loans
Unlike a USDA loan, a conventional loan isn’t backed by the government. A conventional loan requires a down payment, but doesn’t have strict income or geographic requirements. Below is the breakdown of the difference between the two loan programs.
|Loan requirement||USDA loans||Conventional loans|
|Minimum credit score||640||620|
|Mortgage insurance/guarantee fees||1% guarantee fee 0.35% of loan amount for annual guarantee fee||0.15% to 1.95% annual premium (required only if down payment is less than 20%)|
|Income limits||Up to moderate household income limit based on area||Income maximum is 80% of area median income for HomePossible program and HomeReady Program|
|Property location limits||Rural areas designated by the USDA||No restrictions|
Types of USDA loans
Under the USDA home loans program, there are two main types: USDA direct loans and USDA guaranteed loans.
USDA direct loan
A USDA direct loan — also known as the Section 502 Direct Loan Program — is a mortgage made straight from the USDA. This home loan program is for low- to very-low income borrowers who wouldn’t qualify for an affordable mortgage from other sources and otherwise wouldn’t have access to quality housing in rural areas. The loan program may offer payment assistance that buyers receive to both qualify for a mortgage and help bring monthly mortgage payments down. The exact amount of payment assistance depends on a home buyer’s income and family size.
USDA guaranteed loan
USDA direct loan vs. USDA guaranteed loan: How do they differ?
|USDA direct loan (single family)||USDA guaranteed loan (single family)|
|Main qualifications||Very-low to low income households in rural areas||Very-low to moderate income households in rural areas|
|Loan limits||Subject to area loan limits||No limit|
|Loan terms||33 years; 38 years for very low income applicants||30 years|
|Financing fees||$25 credit report fee; may also include typical fees as part of the loan||One-time upfront fee of 1% 0.35% annual fee|
Housing repair loans and grants
The USDA also offers the Section 504 Home Repair program, which finances home improvements for very-low income homeowners in rural areas. To qualify you must have a family income below 50% of the area median income and be unable to find affordable credit elsewhere. In addition, if you’re 62 or older and unable to pay for a repair loan, you may qualify for a grant through this program.
USDA loans: Pros and cons
|No down payment||Limited to rural areas|
|Loan terms of up to 38 years||Subject to maximum income limits|
|Offers mortgage payment assistance||May require a 1% upfront guarantee fee|
|Low interest rates: 2.50% for very low to low income borrowers on a single family direct loan (down to 1% when modified by payment assistance)||Can't be used for a second home|
How to qualify for a USDA loan
To qualify for a USDA loan to purchase a home, you’ll need to meet income and geographic requirements and be unable to get a reasonable loan from other resources. You’ll also need to take extra steps in applying compared to other types of mortgages. These steps include:
→ Submitting the USDA application through the Guaranteed Underwriting System (GUS): The Guaranteed Underwriting System is specifically designed for USDA loans and only USDA-approved lenders have access to it. Lenders use this system to verify that your property and income meets USDA requirements.
→ Obtaining a clear Credit Alert Interactive Verification Reporting System (CAIVRS) report: Lenders check the Credit Alert Interactive Verification Reporting System to verify that you haven’t defaulted on any federal debt.
→ Completing a homeownership education course: If you’re a first-time homebuyer, you must complete an approved homeownership course before getting a USDA loan.
You should also be aware that if you have a USDA loan and sell your home, you’ll be responsible for repaying the subsidy, known as a subsidy recapture.
USDA income and property eligibility
Here is a rundown of income and property eligibility requirements:
Minimum credit score for USDA loan
The minimum credit score for a USDA loan is 640. However, if you don’t have enough credit to obtain a credit score or have a score less than 640, you can fill out a credit history worksheet, Form RD 1944-61 for consideration. With this form, you can use rent, utility bill and phone bill payments to show creditworthiness.
How much down payment do you need for a house with a USDA loan?
With USDA loans, there is no down payment requirement. However, you may need to have a homebuyer education fee, a tax service fee or appraisal fee.
How do I apply for a USDA loan?
You can apply for a USDA loan by taking the following actions:
- Verify the income limits in your area to see if you qualify
- Search for a USDA-approved lender
- If you’re a first-time homebuyer, complete a homebuyer education course
- Use the USDA site to search for a home in a USDA-eligible area
- Complete a loan application
- Prepare and provide the necessary income, asset and credit information to your lender
Who is a good candidate for a USDA loan?
The ideal candidate for a USDA loan has the following qualities:
→ A credit score of at least 640
→ Employment for at least two years
→ A debt-to-income ratio no greater than 41%
→ A need of a safe and sanitary primary residence
→ Looking to live in a USDA-designated rural area
→ Tried and failed to obtain a reasonable loan through other sources
USDA loan FAQs
What are the current USDA loan interest rates?
The current interest rate is 2.50% for very-low to low-income borrowers on a single family direct loan. The interest rate can go down to 1% when modified by payment assistance.
Is it hard to get a USDA home loan?
Yes. The USDA has strict income and location requirements to qualify for a home loan.
Is the USDA loan limited to first-time home buyers?
No. The USDA home loan programs aren’t limited to first-time home buyers, but are limited to primary residences.
How long does it take to get approved for a USDA direct loan?
The processing time can vary depending on fund availability, completeness of application and the demand in the area in which you’re interested in buying.
Do USDA requirements include mortgage insurance?
No. The USDA direct loans don’t have mortgage insurance, while the USDA guaranteed loans charge an annual guarantee fee instead of mortgage insurance.
Can I use the USDA loan program for home improvements on an existing home?
Yes. You can use the Section 504 Home Repair program for improvements on your existing home, so long as you meet the age, location and income requirements.
Can I refinance my USDA mortgage?
Yes. You may refinance your USDA mortgage under three specific refinance offerings, which are non-streamlined, streamlined and streamlined-assist.
Is there a maximum loan size for the USDA loan program?
For USDA direct loans, borrowers are subject to area loan limits. USDA guaranteed loans don’t have a maximum loan size limit.
Can I use the USDA loan for a vacation home, business or rental property?
No. USDA loans can only be used for primary residences, not second homes or income producing activities. However, the multifamily loans can be used to provide affordable rurally-located rental housing to lower-income individuals and families, as well as older individuals and people with disabilities.