What Is a USDA Home Loan?

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Updated on Thursday, January 17, 2019

Homebuyers seeking private mortgages backed by the U.S. government are well-advised to investigate U.S. Department of Agriculture (USDA) loans. Also known as the Section 502 Single Family Housing Guaranteed Loan Program, USDA loans offer no-money-down financing for a property purchase in an approved suburban or rural area.

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The program is designed to assist borrowers from low- to moderate-income households find affordable homeownership opportunities while stoking economic growth in suburban and rural areas nationwide. Through USDA loans, many first-time buyers can purchase a home even without being able to front a traditional 20% down payment. Major benefits include low monthly mortgage insurance premiums, flexible credit requirements and favorable interest rates.

USDA loans must include mortgage insurance. The agency lowered both its upfront and monthly insurance fees as of October 1, 2016.

Read to learn more about the types of loans available through the USDA.

Single Family Housing Direct Home Loans

Loan details:

  • Terms:
    • Fixed interest rate pegged to current market rates at approval or closing, whichever is lower
    • Interest rates as low as 1% where payment assistance is provided
    • Up to a 33-year payback period, extended to 38 years when the shorter term is unaffordable
    • No down payment required
  • Application process:
    • Initial determination of eligibility through the Single Family Housing Direct Eligibility Assessment tool
    • Applicants must be without proper housing, unable to obtain loans through other methods, agree to occupy the property as a primary residence and meet citizenship or eligible noncitizen requirements
    • Potential applicants must submit a complete application for official USDA Rural Development regardless of the assessment results
    • Upon receipt of application, eligibility is determined using verified applicant data and region-specific requirements
    • There is no specific application period — applications are accepted year-round
  • Income limits:
    • Applicant’s total adjusted income must fall at or below the applicable low-income limit for the desired area of residence

Single Family Housing Repair Loans & Grants

Loan details:

  • Terms:
    • Fixed 1% interest rate
    • Lifetime limit of $7,500
    • Repayable over 20 years
    • Must be repaid if property is sold in less than three years
    • Full title service required for loans of $7,500 or higher
    • Grant/loan combination may be offered if applicant cannot repay all costs
  • Application process:
    • Qualified borrowers must own and occupy the home in question, be unable to obtain credit elsewhere, have a household income below 50% of the area median, and for grants, be aged 62 or older and unable to repay a repair loan
    • Home loans are available year-round on a first-come, first-served basis
    • Approval times are contingent on funding availability in a given area
  • Income limits:
    • Borrowers must have a household income below 50% of the area median
    • Amounts will vary depending on region

Single Family Housing Guaranteed Loan Program
Loan details:

  • Terms:
    • Provides a 90% loan note guarantee to approved lenders to reduce the risk of extending 100% loans to eligible homeowners in rural areas
    • Funds may be used for purposes including:
      • Refinancing of eligible loans
      • New or existing residential property used as a permanent residence, including closing costs and reasonable customary expenses involved with the transaction
      • Equipment or special design features to accommodate a disability
      • Energy-efficiency items
      • Site preparation costs, including grading, foundation, walks and fences
  • Application process:
    • Potential applicants should contact their lender
    • Applications are submitted through approved lenders
  • Income limits:
    • Applicants must be income-eligible
    • Find out more about your particular area here

Multi-Family Housing Direct Loans
Loan details:

  • Terms:
    • Up to a 30-year payback period
    • Either the lowest rate at the time of approval or closing will apply
    • For applicable details and current interest rates, contact your local Rural Development Office
  • Application process:
    • Applications are accepted annually, when a Notice of Funding Availability is posted in the Federal Register
    • Contact your local Rural Development Office or Rural Rental Properties to apply as a tenant
  • Income limits:
    • Fact sheet specifies “very low-income to moderate-income families” — contact your local lender for more specific details

Multi-Family Housing Loan Guarantees
Loan details:

  • Terms:
    • Guarantees up to 90% of the loan amount offered
    • Minimum term of 25 years, maximum of 40 years
    • Negotiated interest rate fixed for life of loan guarantee
    • Nonprofits may borrow up to 97% of total development cost or appraised value, whichever is less; for-profits may borrow up to 90%
  • Application process:
    • Next application deadline is December 31, 2021
    • Automatic eligibility goes to approved, active members of Fannie Mae, Freddie Mac, Ginnie Mae, U.S. Department of Housing and Urban Development (HUD), Federal Home Loan Bank and state or local finance agencies
    • Private lenders may apply for a guarantee on loans made to eligible borrowers preserving or building affordable rural rental housing
      • Eligible borrowers include non-profit organizations, for-profit organizations including LLCs, most state and local governmental entities, and federally recognized Native American tribes
  • Income limits:
    • Potential renters must be “low- to moderate-income,” according to the program fact sheet

Hidden Costs of USDA Loans

  • Closing costs come in two categories: acquisition of loan and transfer title, which varies with the lender, and property expenses, which include title and lender fees. These fees include:
    • Loan origination: 0% to 1% of total loan amount
    • Underwriting/processing/administration fee: $500-$1,000
    • Appraisal: $300-$500
    • Credit report/miscellaneous lender fees: $300
    • Escrow fee: $500
    • Title fee: $500-$1,000
    • Signing fee: $100
    • County recording/miscellaneous title and escrow fees: $300
  • Upfront guarantee fee on a USDA loan is 1% of the total mortgage amount, down from 2.75% in 2016; this can be rolled into the loan amount to limit out-of-pocket costs
  • A certain number of months’ worth of property expenses must be prepaid when you get a mortgage. This includes homeowners insurance, which runs $500 to $1,000 and up annually — pegged to home value — with 12 to 14 months prepaid at closing, as well as property taxes, which constitute approximately 1% of the property value per year, with four to eight months prepaid at closing

How Do I Qualify for a USDA Loan?

Minimum loan requirements:

  • Creditworthiness with a minimum score of 640
  • A year of no late payments or collections activity
  • Adjusted household income equal to or less than 115% of the area median
  • U.S. citizenship or permanent residency
  • Dependable, stable income
  • Property is located in a qualified rural area and will be the borrower’s primary residence

Property and Location Requirements
Property must:

  • Be the borrower’s primary residence
  • Have adequate utilities, water and wastewater disposal
  • Have direct access to a street, road or driveway

Location must:

  • Not be part of an urban area
  • Hew to population requirements of up to 35,000, depending on area designation

Alternatives to a USDA Loan

FHA Loan

  • Requires 3.5% down payment with 580 or better credit, 10% down payment with score between 500 and 579
  • Low credit score requirements
  • Low interest rates
  • Only for owner-occupied borrowers
  • Fixed and adjustable rates available
  • 15-year and 30-year terms available

VA Loan

  • Minimum 3.5% down payment
  • Upfront mortgage insurance premium plus annual premiums
  • No credit score requirement; some borrowers with scores of 580 and lower may be financed
  • Loan limits dependent on housing type and county

Conventional Mortgage Loan

  • No government backing
  • Minimum 5% down payment, but private mortgage insurance (PMI) required for those who cannot pay 20%
  • 660 credit score a standard benchmark for loan approval
  • Standards vary by lender and loan type

Where to apply for USDA loans

Start by consulting this list of approved USDA lenders. Applications must be submitted through an approved lender. For more information, consult the USDA site.


According to Tendayi Kapfidze, chief economist at LendingTree, which owns MagnifyMoney, the two main criteria that differentiate USDA loans from other financial instruments are that properties must be located in a USDA-defined rural area and applicants must hew to income limits.

“I think the main thing about the USDA loans is that they tend to have lower interest rates,” he said. “There (are sometimes) more benefits to looking into USDA loans because they’re guaranteed.”

That subsidy, he said, makes USDA loans cheaper for eligible borrowers than conventional mortgages. However, not everyone will qualify. Contact an approved lender to find out if a USDA loan is right for your specific financial situation.

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