USDA loans: What to know

There are many different mortgage options when it comes time to buy a home. USDA loans are one of them.

Offered by the U.S. Department of Agriculture, USDA loans are intended for low-income prospective homebuyers in rural areas. And unlike many other types of mortgages, USDA loans don’t require a down payment.

But who exactly qualifies for a USDA loan? How exactly do they work? And how do they compare to other home loans?

Key takeaways

• USDA loans are for low-income prospective homebuyers in rural areas and are intended to help stimulate growth and development in those communities.
• Strict income limits and location guidelines apply to USDA loans.
• Unlike many other mortgage types, USDA loans don’t require a down payment.

The USDA provides an opportunity for those who may not qualify for traditional mortgages to purchase homes in eligible rural areas.

USDA loans don’t require a down payment but are subject to strict income limits.

Overall, the USDA loan program offers an important resource for low-income prospective homebuyers and helps stimulate growth and development in rural communities.

There are three main types of USDA loans:

• Guaranteed loans: Also known as the Section 502 Guaranteed Program, these loans are provided by USDA-approved lenders and come with a 30-year loan term.
• Direct loans: Also known as the Section 502 Direct Program, these loans are offered directly by the USDA and typically come with a 33-year loan term. In some cases, however, the loan term may be 38 years.
• Repair loans: Also known as the Section 504 Home Repair Program, these loans provide up to $40,000 specifically for home improvements and repairs. The program also offers grants—up to $10,000—for low-income homeowners who are at least 62 years old.

Remember: USDA loans come with strict income limits and are limited to eligible rural areas. The USDA defines these eligible rural areas as “open country or any town, village, city, or place, including the immediately adjacent densely settled area, which is not part of or associated with an urban area.”

And unlike other types of mortgages, USDA loans don’t have a specific credit score requirement. However, USDA-approved lenders may require scores of at least 640.

For more information on how to qualify for a USDA loan, check out the USDA Income and Property Eligibility Site.

USDA loans come with the same fees as other types of mortgages—like origination fees and discount points, for example. But potential borrowers should also be aware of a couple of additional fees that are associated with USDA Guaranteed loans: 

• Upfront guarantee fee: This fee helps protect the government in case loan repayments are not made. It can be financed into the loan amount—which means borrowers don’t have to pay it out of pocket. The USDA determines the fee each fiscal year, and it can’t exceed 3.5% of the original principal—the amount borrowed from the lender.
• Annual fee: Borrowers also have to pay an annual fee. Like the guarantee fee, the annual fee can be financed into the loan amount and is determined by the USDA each fiscal year. The fee can’t exceed 0.5% of the unpaid principal balance.

USDA loans can be a great mortgage option for low-income homebuyers in eligible rural areas because these loans require no down payment and offer relatively low interest rates. And because they don’t have a specific credit score requirement, they can be a good option for those who are building or rebuilding their credit.

However, strict income limits and location guidelines can be potential drawbacks. The upfront and annual fees associated with Guaranteed loans are also worth keeping in mind.

Besides income limits and location guidelines, the biggest difference between USDA loans and other types of mortgages is the down payment requirement—or lack thereof.

USDA loans don’t require a down payment, but other mortgages typically do. Conventional loans, for example, typically require at least 3%. And loans backed by the Federal Housing Administration require 3.5%.

And while there are other types of mortgages that don’t require a down payment—like USDA loans—they may come with interest rates that are higher than those offered by the USDA. That’s the case with loans from the U.S. Department of Veterans Affairs, for example.

For more information about different types of mortgages, check out Capital One’s breakdown of common home loan types and how they work.

How a prospective borrower applies for a USDA loan depends on the type of loan.

To apply for a Guaranteed loan, a borrower must contact a USDA-approved lender in their state. To apply for a Direct or Repair loan, borrowers can use the USDA’s website.

USDA loans can be a great mortgage option for certain homebuyers. They have strict income limits and location guidelines and are intended for low-income prospective homebuyers in rural parts of the country.

And since they’re specifically for rural areas, they’re an important way for the USDA to try to stimulate growth and development in rural communities.