What Is a USDA Home Loan?

The U.S. Department of Agriculture (USDA) home loans program offers mortgages to low-income residents of rural areas who cannot otherwise obtain a conventional mortgage.

If you live in a rural area and can't qualify for a conventional loan, you may qualify for either a USDA guaranteed loan or a USDA direct loan.

The home loans program is designed primarily to help lower-income people living in unhealthy or unsafe rural conditions obtain a home that has modern utilities and adequate space.12

Depending on their circumstances, the program can offer qualified applicants one of two options: a federal guarantee of a mortgage through a commercial bank, or a direct loan from the government. Both are 0% down payment loans.

KEY TAKEAWAYS

  • The United States Department of Agriculture (USDA) provides mortgages of last resort to the people in rural areas who need them the most.
  • Qualification standards for these home loans are lenient compared to those of other mortgages, but you will need a steady income that's high enough to repay the loan over 30+ years at a fixed interest rate.
  • The definition of "rural" is broader than you might think. The rules for the Direct Loan program define an eligible rural area as having less than 35,000 residents. 1
Understanding the USDA Home Loan

A USDA home loan is a mortgage either made or guaranteed by the United States Department of Agriculture's Rural Housing Service agency to help households with very low to moderate incomes purchase safe and affordable homes in rural areas.

The Section 502 loan program has been available since 1949.3 Today, it provides low-cost financing to buy a home through two programs: the Section 502 Guaranteed Loan and the Section 502 Direct Loan.

Both programs provide 100% home financing to eligible borrowers.4

The 2 Types of USDA Home Loans

The USDA Guaranteed and Direct loan programs are very different, although both provide housing in rural areas and offer no-down-payment financing. Here's what you need to know about how each program works and how to qualify.

 

To be eligible for a USDA Guaranteed or Direct loan, you cannot be delinquent on any federal debt and must be a U.S. citizen or legal nonresident alien.21

Guaranteed USDA Loan

The USDA will guarantee 90% of a mortgage amount for qualified applicants who obtain a mortgage through a bank or other commercial lender. This makes it feasible for many to get approval for a 30-year, fixed-rate loan with no down payment.

The guaranteed loan can be used to buy, construct, repair, renovate, or relocate a primary residence.

USDA guaranteed loans (but not USDA direct loans) require borrowers to pay a loan guarantee fee of 1% of the amount borrowed.5 This fee can be paid by the lender.6 Borrowers must also pay an annual fee of 0.35% of the loan amount.5

Individual lenders determine the interest rates they're willing to offer borrowers on these loans, so it's important to shop around.7 Here's how to qualify:

Down payment: 0%.

Assets: None.2

Debt-to-income ratio: 41%.8 If you show a history of spending more than 41% of your income on debt payments while still meeting all your financial obligations, you may still qualify.9

Credit score: No minimum, as long as you can demonstrate an ability and willingness to repay the loan.2 It may be easier to qualify with a score of at least 640. However, you may still qualify if your score is lower or if you have no score.10 You will have a stronger case if you don't have delinquent payments on your credit report or if you can provide a history of on-time rental payments or another positive source of nontraditional credit.11

Income: Low to moderate-income, not to exceed 115% of the area's median income.2 Must not qualify for conventional financing without private mortgage insurance (PMI). One-year history of traditional employment or two-year history of self-employment or seasonal income.12

Property location: Must be in a rural area.2

Property type: Primary residence, non-income-producing.7 The property cannot have an in-ground swimming pool.13

Home size: Must be considered modest for the area.14

Property size: Must be typical for the area.15

Direct USDA Loan

Direct USDA loans come straight from the USDA and are for very low- and low-income borrowers who can't get an affordable mortgage from other sources and who don't have decent, safe, and sanitary housing. The typical loan term is 33 years, but loan terms can be for as long as 38 years.1

The interest rate on November 2021 was 2.5%, but your effective rate can be as low as 1% after subsidies.16 Here's how to qualify for a direct USDA loan:

Down payment: 0%.1

Debt-to-income ratio: 41%, unless there are compensating factors such as a history of comfortably spending a higher percentage of income on housing.17

Credit score: Ideally at least 640. However, you may still qualify if your score is lower or if you have no score. You will have a stronger case if you have few or no delinquent payments on your credit report or if you can provide proof of nontraditional credit, such as a history of rental payments.18

Income limit: Low and very low income. The limit varies by county and household size.19

Property location: The location must be in a rural area, which is defined as an area with a population of 35,000 or less.16

Property type: Primary residence, non-income-producing. The property cannot have an in-ground swimming pool.16

Home size: 2,000 square feet or less.16

Property size: Small enough that it can't be subdivided into smaller parcels under local zoning laws.13

How to Get a USDA Home Loan

For a guaranteed loan, check out the USDA's list of approved lenders. These lenders offer USDA loans. You should shop around to make sure you're getting the best terms.

For a direct loan, apply directly to USDA Rural Development.4 The financing for these loans comes from the government.

What Type of Home Loans Does the USDA Offer?

The U.S. Department of Agriculture (USDA) has two home loan programs: the Section 502 Guaranteed Loan and the Section 502 Direct Loan. Both help eligible buyers with low to moderate incomes to purchase homes in rural areas and small towns.

  • With a guaranteed loan, 90% of the loan amount is backed by the USDA. Because of the guarantee, lenders offer these loans with a fixed rate and no down payment.
  • Direct loans are issued by the USDA to eligible buyers who can't get an affordable mortgage from other lenders and who don't have decent, safe, and sanitary housing.

What Are the Eligibility Requirements for a USDA Home Loan?

The home must be located in an area with a population of 35,000 or less and the home must be a primary residence. Loans are available to those with low and moderate incomes.

Income limits vary depending on where you live and the loan program.

In general, a credit score of at least 640 is ideal, but you may still qualify if your score is lower.

Also, you cannot be delinquent on any federal debt and must be a U.S. citizen or legal nonresident alien.

How Do I Apply for a USDA Home Loan?

To apply for a guaranteed loan, you’ll need to research the USDA's list of approved lenders. Shop around to make sure you get the best loan terms.

For a direct loan, you will need to submit an application to USDA Rural Development.

 

 

The Bottom Line

USDA guaranteed and direct home loans help very-low, low-, and moderate-income borrowers in less-populated areas get affordable mortgages to purchase modest homes with no down payment.

If you thought you'd never be able to afford a home or qualify for a mortgage or you are living in overcrowded or unsafe housing, get in touch with USDA Rural Development and see if one of their housing programs might be able to help you.