A USDA home loan is a unique form of mortgage the government offers to low-to-moderate-income home buyers in qualified towns and rural areas.
What Is a USDA Home Loan?
USDA home loans are mortgages offered or guaranteed by the U.S. Department of Agriculture housing loan programs that allow first-time home buyers in rural areas or those who cannot get a conventional loan to purchase a house.
Also known as RD or rural development loans, USDA home loans have zero down payment requirements and lenient credit scores. Additionally, they allow home buyers with a low income to qualify for a modest interest rate, making homeownership more accessible.
Pros and Cons of USDA Loans
Benefits
- There is no formal loan limit.
- No down payment requirements.
- Loans are available for home purchasing and improvements.
- Loans are available with low fixed interest rates.
- The seller can cover the closing costs.
Drawbacks
- The property location.
- Borrower's income.
- Loan size.
- Home use (as a primary residence only).
The loan also comes with certain upfront and annual fees.
Key Features and Eligibility
USDA loans are government-backed loans offered to qualified low- or moderate-income borrowers living in designated rural areas. The key features of the USDA loans include:
- Down payment: No down payment.
- Asset requirement: None.
- Income requirements: Eligible borrowers have low-to-moderate income not exceeding 115% of the area's median income. Borrowers must have one year of traditional or two years of seasonal income or self-employment. They must not qualify for conventional financing.
- Credit score: Not specified, but typically needs to be 640 or higher.
- Debt-to-income ratio: Borrowers can pay 41% of their income towards debts while meeting their financial obligations and still qualify.
- Property location: In a designated rural area with a population of 35,000 or less.
- Property type: The home is a primary, non-income-producing residence.
- Property size: Modest (2,000 sq. ft. or less).
The eligibility requirements for a USDA loan include:
- The home must be a primary residence in a rural area with a population of 35,000 or less.
- The loan is available to people with low or moderate incomes, with income limits depending on the loan program and your residence location.
- The borrower must be a U.S. citizen or permanent resident with a proven record of stable income.
- The borrower must have a minimum credit score of 640, although a lower score may also qualify. The borrower must have a demonstrated history of paying back debt.
Types of USDA Loans
Direct Loans
USDA direct loans help low- and very low-income individuals who lack safe housing or cannot qualify for a conventional loan. As of December 1, 2024, the interest rate for single-family housing direct loans is 4.375%.
These loans cover homes with market values below the area loan limit, which varies by location. Depending on the county or state, loan limits range from $398,600 to $919,800. For example, limits may be around $330,000 in rural areas or exceed $700,000 in high-cost markets like Hawaii or California. Borrowers with very low incomes qualify for loan terms of up to 38 years.
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Loan Guarantees
The USDA guarantees loans from participating local lenders, allowing home buyers to enjoy a lower interest rate with zero down payment requirements. Instead of paying a traditional PMI, borrowers pay a lower interest rate of 1% and an annual fee of 0.35% of the loan balance.
Home Improvement Loans and Grants
The USDA provides loans up to $40,000 and grants up to $10,000 to help homeowners upgrade or repair their homes. Homeowners can combine loans and grants for a total assistance amount of $50,000.
The loans have a 20-year term with a 1% interest rate. If homeowners sell their property within three years of receiving a grant, they must repay it.
Takeaway
USDA offers direct and guaranteed loans to low- and moderate-income borrowers living in designated rural areas to purchase modest housing at affordable rates. By providing additional support for home improvement projects, the program aims to make homeownership more accessible, ensuring borrowers can upgrade and maintain their homes with minimal financial strain.