USDA loans are one of many options available to finance a home purchase. However, their attributes and eligibility requirements make them unique from other types of home loans. Still, if a USDA loan is an option for you, there are some big perks you might want to take advantage of.

What is a USDA loan?

A USDA home loan is a no-down payment mortgage for low- and moderate-income homebuyers in largely rural areas. USDA loans are part of a national program created by the U.S. Department of Agriculture to help create loans for first-time homebuyers or people who don’t meet conventional mortgage requirements. They are sometimes referred to as rural development or RD loans.

Along with no need for a down payment, USDA loans have another advantage: you could qualify for a low, fixed interest rate if you have low income.

Some drawbacks, though, are that the property must be located in a USDA-approved area and borrowers cannot exceed income limits.

Types of USDA loans

USDA guaranteed loans

The USDA guaranteed home loan program (officially known as Section 502 Guaranteed) allows approved mortgage lenders to provide 30-year fixed-rate loans to borrowers in USDA-eligible locations. It’s called a “guaranteed loan” because the USDA guarantees 90 percent of the loan to lenders in the event you were to default on the mortgage.

Along with buying a home in a USDA-approved area, you’ll also need to meet an income requirement: no more than 115 percent of your area’s median household income (AMI). You can find income limits for your market using this tool.

USDA direct loans

Also known as Section 502 Direct, USDA direct loans offer low-rate home loans to individuals in rural areas in need of adequate housing. Unlike USDA guaranteed loans, you’ll apply for a direct loan through the USDA’s Rural Development Service Centers.

Direct loans are only available to households with low and very low income. (You can view income limits here). There’s also a limit on how much you can borrow, depending on the county where the home is located. (You can view area loan limits here.)

Direct loans have a fixed interest rate of 4.125 percent, which can be reduced down to 1 percent if you qualify for payment assistance. The loan terms range up to 33 years, or 38 years for very low income borrowers.

USDA repair loans and grants

The USDA repair loan program (Section 504 Home Repair) is similar to the direct program in that it caters to low-income individuals, but different in that it provides loans only up to $40,000 , and only to help improve or repair a home. It also offers grants to very low-income homeowners aged 62 or older to help remove hazards at home. These are capped at $10,000.

USDA loan requirements

Eligible properties

The easiest way to find out if a home is in a USDA-eligible area is to check the USDA website. Homes purchased with USDA loans must be located in eligible rural areas. The USDA defines these 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.”

USDA mortgages are only available in these rural areas as part of a government initiative to promote homeownership and economic growth. These loans can help attract and retain people in these locations.

Income limits

The USDA guaranteed loan program is geared toward low- and moderate-income homebuyers. For this reason, applicants can’t earn more than certain income limits, which vary by metro area and family size. In more expensive areas, the income ceiling is higher. You can check income limits for your county and household size using the same property eligibility tool on the USDA website.

To prove income, you’ll need to provide the lender with documentation such as:

  • Paystubs
  • Tax statements (W-2s, 1040s and 1099s)
  • Alimony and child support payments
  • Social Security payments
  • Statements for bank and investment accounts

Credit score

The USDA doesn’t impose a blanket credit score requirement for all borrowers, but typically, USDA-approved lenders look for a score of at least 640.

USDA loan fees

USDA mortgages come with two fees:

  • Upfront guarantee fee: The upfront guarantee fee this fiscal year is 1 percent of the loan amount. This fee can often be rolled into the mortgage instead of paying it out of pocket.
  • Annual fee: The annual fee is 0.35 percent of the loan amount. A $100,000 mortgage, for example, would have a $1,000 one-time payment and a $350 per year ongoing payment for the life of the loan.

Both of these fees are charged to the lender who then, usually, passes the cost on to the borrower. These fees keep USDA loans subsidy-neutral, which means that any losses incurred by the program are paid for by these fees instead of taxpayer dollars. Depending on the needs of the program, the fees can change annually.

Other USDA mortgage costs

  • Origination fee: Many lenders charge an origination fee on mortgages, regardless of loan type. The fee usually costs around 1 percent of the amount you’re borrowing.
  • Loan application fee: Similar to applying for college, some lenders charge a nominal fee to complete the mortgage application.
  • Title insurance and services: When you buy a home with a mortgage, you’ll be required to pay for a title search and lender’s title insurance policy. The cost varies depending on the closing attorney or settlement or title company you work with.
  • Processing or underwriting fees: In addition to (or sometimes in lieu of) an origination fee, some lenders charge a “processing” or “underwriting” fee. This cost covers the expense of underwriting your loan application.
  • Credit report fee: Many lenders charge a small fee to run a credit check.
  • Appraisal: As the homebuyer, you’ll be responsible for paying for the home to be appraised before the lender can approve your loan. An appraisal typically runs about $350 to $400.
  • Discount points: Many lenders offer the option to purchase mortgage points to buy down your loan’s interest rate. One point costs 1 percent of the amount you’re borrowing.

Pros and cons of USDA loans

The major benefit of a USDA home loan is that there’s no down payment requirement. This can be a great program for homebuyers on a budget who are flexible about where they live. The cons mostly have to do with the restrictions on where you can buy or how much your family can make in terms of income.


  • No down payment required
  • No formal loan limit for guaranteed loans
  • Seller can pay the closing costs
  • Available for both purchasing property and refinancing
  • Low, fixed interest rates for direct loans


  • Strict guidelines around where property is located
  • Must use home for primary residence
  • Limited income requirements
  • Upfront and annual fees

How do USDA loans compare to other types of loans?

USDA loans aren’t the only type of mortgage out there. If you’re not eligible for a USDA loan, you might be for an FHA or VA loan, or even a conventional loan. Here’s an overview of some key differences between these types of loans:

USDA loan Conventional loan FHA loan VA loan
Credit requirements None, but 640 is standard 620 580 None unless lender requires
Debt-to-income (DTI) ratio requirements Up to 41% Up to 43% Up to 50% Up to 41%
Down payment requirements None 3% or 5% 3.5% None

How to apply for a USDA loan

To apply for a USDA loan, you’ll first need to determine if you qualify. Consult the USDA property and income eligibility maps. If you meet those parameters, next consider whether you’ll want or need a guaranteed or direct loan. Remember: Guaranteed loans have higher income limits, and you’ll apply for one through a USDA-approved lender. Direct loans, on the other hand, are reserved for lower-income borrowers who lack access to safe housing.

When you’re ready to apply, you’ll submit paperwork about your finances, including income, assets and debt, and undergo a credit check. If preapproved, you can begin searching for a home in an appropriate area based on USDA eligibility.