The U.S. Department of Agriculture (USDA) home loan program provides mortgages to low-income residents in rural areas who may not be eligible for conventional loans from commercial lenders. If you reside in a rural area and do not qualify for a traditional mortgage, you may be eligible for either a USDA Guaranteed Loan or a USDA Direct Loan.
This program is primarily designed to assist individuals in low-income households who are living in substandard or unsafe rural conditions, helping them obtain homes with modern utilities and adequate space. Depending on the applicant's situation, the program offers two options: a federally guaranteed mortgage through a commercial lender or a direct loan from the government. Both options require no down payment.
A USDA home loan is a mortgage either provided or guaranteed by the USDA’s Rural Housing Service, aimed at helping households with very low to moderate incomes purchase safe, affordable homes in rural areas. The Section 502 loan program, established in 1949, offers low-cost financing options for homebuyers through two types of loans: the Section 502 Guaranteed Loan and the Section 502 Direct Loan, both of which provide 100% financing.
Guaranteed Loan
The USDA guarantees 90% of the mortgage amount for qualified applicants who obtain their mortgage through a bank or commercial lender. This makes it possible for many applicants to secure a 30-year, fixed-rate loan with no down payment. The guaranteed loan can be used to purchase, construct, repair, renovate, or relocate a primary residence.
While the USDA Guaranteed Loan requires borrowers to pay a loan guarantee fee of 1% of the loan amount, this fee may be covered by the lender. Additionally, borrowers are required to pay an annual fee of 0.35% of the loan amount.
USDA loans offer several advantages over other mortgage options, primarily because they are backed by the USDA, which guarantees the loans against default. This guarantee allows lenders to take on more risk and, in turn, offer more favorable terms to homebuyers.
No Down Payment
One of the most notable benefits of USDA loans is the ability to secure 100% financing, eliminating the need to save for a down payment. Alongside VA loans, this government-backed option remains one of the few mortgage types that require no down payment.
Competitive Interest Rates
Thanks to the USDA guarantee, lenders are able to offer some of the most competitive interest rates available. While the exact rate will depend on factors such as credit profile and market conditions, USDA loans typically provide lower rates than conventional loans.
Low Monthly Mortgage Insurance
Conventional loans typically require private mortgage insurance (PMI) if the borrower does not provide a 20% down payment, and FHA loans often come with high annual mortgage insurance fees. USDA loans, however, do not require PMI. Instead, they have two fees: an upfront guarantee fee, paid at the time of closing, and an annual fee, which is incorporated into the monthly mortgage payment. The upfront fee is 1% of the total financed amount, and the annual fee is 0.35% of the loan’s current balance. USDA loans have the lowest funding fee compared to other government-backed loan programs.
Flexible Credit Guidelines
Conventional lenders often require a credit score of at least 640, with scores closer to 720 needed to secure the best interest rates. While USDA loans do not have a minimum credit score, applicants must have a score of 640 or higher to qualify for the USDA’s automated underwriting system. Borrowers with lower credit scores may still qualify through manual underwriting.
Wide Eligibility
A significant advantage of USDA loans is that a large portion of the United States qualifies as an eligible rural area. The USDA defines rural areas as those with populations of fewer than 35,000, which means approximately 97% of the country is eligible for USDA loans.
Opportunity for Homeowners
In certain cases, individuals who already own a home may still be eligible to apply for a USDA loan. While this benefit only applies in specific circumstances, it provides homeowners with additional options for financing if they wish to purchase another property.
Down Payment: 0%
Assets: No asset requirements
Debt-to-Income Ratio: 41%. Applicants who have a history of spending more than 41% of their income on debt payments but continue to meet their financial obligations may still qualify.
Credit Score: No minimum score requirement, provided you demonstrate the ability and willingness to repay the loan. While a score of at least 640 may make it easier to qualify, applicants with lower scores or no credit score may still be eligible. A stronger application can be made with a clean credit history or a record of on-time rental payments or other nontraditional credit sources.
Eligibility: To qualify for a USDA Guaranteed or Direct loan, applicants must not have any outstanding federal debt and must be U.S. citizens or legal nonresident aliens.
Income: Applicants must have low to moderate income, not exceeding 115% of the area’s median income. They must also not qualify for conventional financing without private mortgage insurance (PMI). A minimum of one year of traditional employment history or two years of self-employment or seasonal income is required.
Property Location: Must be located in a rural area, as defined by the USDA.
Property Type: Must be a primary residence and cannot generate income. The property must not have an in-ground swimming pool.
Home Size: The home must be considered modest in size for the area.
Property Size: The property must be typical in size for the area.
