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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 requirementUSDA loansFHA loans
Down payment0%3.5%
Minimum credit score640, 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 fees1% guarantee fee 0.35% of loan amount for annual guarantee fee
1.75% upfront premium
0.45% to 1.05% annual premium
Income limitsUp to moderate household income limit based on areaNo income limits
Property location limitsRural areas designated by the USDANo 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 requirementUSDA loansConventional loans
Down payment0%3%
Minimum credit score640620
Mortgage insurance/guarantee fees1% guarantee fee 0.35% of loan amount for annual guarantee fee0.15% to 1.95% annual premium (required only if down payment is less than 20%)
Income limitsUp to moderate household income limit based on areaIncome maximum is 80% of area median income for HomePossible program and HomeReady Program
Property location limitsRural areas designated by the USDANo 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.

For single-family homes: For a single family home, you would go through the Single Family Direct Home Loans program, which may offer a fixed interest rate based on the amount of assistance you receive. These loans typically have 33 or 38-year terms, depending on income level.

For multifamily homes: For a multifamily residence, you can apply for the Multifamily Housing Direct Loans program, which assists in establishing rental housing for very-low- to moderate-income families and individuals, elderly people age 62 and older or people with disabilities. You may use the funds from this program to build, repair and purchase multifamily rental housing for low-income families, the elderly and disabled. The loans last for 30 years and come with competitive interest rates.

USDA guaranteed loan

The USDA Guaranteed loan program is available to moderate- to low-income borrowers in rural areas, allowing for slightly higher income limits than USDA direct loans. As the name implies, the USDA guarantees 90% of your mortgage amount for borrowers who qualify for a home loan through a bank or third-party lender.

For single-family homes: The single family housing guarantee program works with third-party lenders to finance housing for low- to moderate-income families and individuals in rural areas. Like the USDA direct loan, the USDA guarantee also offers no down payment. The USDA will guarantee up to 90% of the loan in order to mitigate the risk to lenders extending 100% of the financing.

For multifamily homes: The multifamily housing guarantee program works with third-party lenders to help finance more affordable rental housing for low to moderate-income individuals and families in rural areas. This program caps rent for individual units at 30% of 115% of area median income and requires a complex to have at least five units.

USDA direct loan vs. USDA guaranteed loan: How do they differ?

USDA direct loan (single family)USDA guaranteed loan (single family)
Main qualificationsVery-low to low income households in rural areasVery-low to moderate income households in rural areas
Loan limitsSubject to area loan limitsNo limit
Loan terms33 years; 38 years for very low income applicants30 years
Financing fees$25 credit report fee; may also include typical fees as part of the loanOne-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

ProsCons
  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:

  • Income limits: Your income can’t exceed 115% of area median income
  • Household income of all adults: The USDA examines your household’s income to ensure it doesn’t exceed area limits.
  • Employment requirements: The USDA looks for a stable employment history of two years.
  • Debt-to-income (DTI) ratio: Your DTI ratio calculates how much of your monthly income goes into monthly debt payments. The maximum DTI the USDA allows is 41%.
  • USDA property eligibility: The USDA allows single family homes, planned-unit developments, condominiums, modular and manufactured homes and new construction for homes that have never been occupied. For USDA direct loans, properties need to be 2,000 square feet or less and cannot have an in-ground swimming pool.
  • Occupancy: You can only use single family USDA loans for a primary residence, not a second home.
  • Residency: You must be a U.S. citizen, U.S. non-citizen national or qualified alien

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:

  1. Verify the income limits in your area to see if you qualify
  2. Search for a USDA-approved lender
  3. If you’re a first-time homebuyer, complete a homebuyer education course
  4. Use the USDA site to search for a home in a USDA-eligible area
  5. Complete a loan application
  6. 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.

 

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