Guide to USDA Loans: Requirements & Eligibility

Since 1949, USDA loans have helped low and middle-income Americans purchase rural homes in the United States.

USDA loans can make homeownership more affordable thanks to low interest rates and less strict requirements for down payments. They also stimulate rural economies by providing funds for new housing construction and rehabilitation.

This guide explains how USDA loans work, as well as their eligibility requirements.

What is a USDA loan?

A USDA loan is a loan guaranteed by the U.S. Department of Agriculture that helps low- and moderate-income Americans buy homes in designated areas, mostly rural but in some cases suburban. 

USDA loans tend to have lower interest rates and more lenient credit requirements than conventional mortgages, and they typically don’t require a down payment.

There are two main types of USDA loans:

• Single Family Housing Guaranteed Loans: The Section 502 Guaranteed Loan program enables lenders to provide affordable housing loans. Lenders can offer relaxed qualification requirements and lower interest rates because the government guarantee reduces their risk.
• Single Family Housing Direct Home Loans: The USDA also offers financing directly to low-income Americans through the Section 502 Direct Loan program. With payment assistance, rates can be as low as 1%.

Low-income Americans can also apply for a Single Family Housing Repair Loan & Grant under the Section 504 Home Repair program to improve the home they already live in. Homes must be located in designated areas. These loans enable homeowners with a household income below 50% of the area median income (AMI) to borrow money for repairs and improvements, including those that address health or safety hazards. Grants are reserved for borrowers ages 62 and older and must be used for removing health and safety hazards.

USDA home loans work similarly to conventional mortgages, with some notable differences related to down payments, interest rates, and closing costs.

Down payments

While most types of mortgages require down payments, USDA loans typically don’t.

Private mortgage insurance

USDA rural development loans don’t require private mortgage insurance (PMI). However, they do require a guarantee fee, which works like mortgage insurance but has a 1% upfront cost, and an annual fee equal to 0.35% of your principal loan balance. The USDA also requires a $25 technology fee.

Interest rates

USDA direct loans offer fixed rates that are typically lower than average mortgage rates for conventional 30-year fixed loans.

With payment assistance, the USDA says effective rates can be as low as 1%. Rates for USDA guaranteed loans are set by the lenders and may be comparable to or lower than conventional and FHA loan rates.

Closing

USDA guaranteed loans require final approval by the Department of Agriculture, which adds time to the closing process.

Repayment terms

While USDA guaranteed loans have traditional 30-year repayments, direct loans offer terms as long as 33 years — and up to 38 years for borrowers with very low incomes — to pay off the mortgage.

What are the USDA loan requirements?

Not everyone can qualify for a USDA loan. The USDA has strict eligibility requirements, which vary for guaranteed and direct loans.

Guaranteed 

• Primary residence: The home you're financing must be your primary residence.
• Citizenship: You must be a U.S. citizen, U.S. non-citizen national, or qualified alien.
• Credit score: While the USDA doesn't establish specific credit score requirements for guaranteed loans, you must show “a willingness and ability to handle and manage debt.” That said, most lenders require at least a 620 credit score, though some may consider credit scores as low as 580.

Direct

USDA direct loans have the same residency and citizenship requirements as guaranteed loans, but credit requirements may be more flexible. There are also additional requirements to note:

• Housing access: You must currently be without “decent, safe, and sanitary housing.” 
• Last resort: You must demonstrate that you’re unable to obtain a mortgage from any other source.

What are the USDA income limits and property requirements?

USDA loan eligibility is based on your income and the property itself.

Income limits

USDA loan income limits vary depending on the type of USDA loan you’re applying for:

• USDA guaranteed loans: Your income cannot exceed 115% of the AMI. You can determine your area’s median income using the USDA’s Income Eligibility tool. For example, if the area median income is $50,000, you’re eligible if your household income is $57,500 or less.
• USDA direct loans: Your income must generally be at or below the applicable income limit, which is typically 80% of the AMI. Again, use the Income Eligibility tool to get your specific county’s AMI. If the area median income is $50,000, you’re eligible if your household income is less than $40,000.

Property requirements

USDA loans are available only for specific homes in designated areas. Your first step should be entering the property's address into the USDA's eligibility locator map so that you can avoid a disappointing false start.

• USDA guaranteed loans: Properties must be within an eligible area as defined by the USDA. Funds can also be used to repair an existing dwelling, refinance an existing USDA loan, or even construct a new home.
• USDA direct loans: Properties must be within an eligible area as defined by the USDA. In addition, properties can’t have a market value above the area loan limit, and can’t be designed for income-producing activities.

Pros and cons

Details on the pros

• Down payment typically not required: Both direct and guaranteed USDA loans are zero-down mortgages for those who qualify, although there are closing costs, and the latter come with a fee at closing. In some cases, borrowers with notable assets may be required to make a down payment.
• Competitive interest rates: USDA loan rates typically are lower than FHA and conventional loan rates. Direct loan rates are currently fixed at 5.00% for low- and very low-income borrowers, but depending on your adjusted family income, you may receive additional payment assistance that reduces your rate to as low as 1%. While private lenders set rates for guaranteed loans, these rates may be lower than conventional loan rates.
• Flexible credit score requirements: While USDA loans don’t have minimum credit score requirements, private lenders usually require a score of 620 or higher. For direct loans, the USDA works with low-credit or no-credit borrowers and judges payment history by reviewing sources such as your rent and utility payments. Even if you’ve gone through a Chapter 13 bankruptcy, you might still be eligible if you’ve completed a debt restructuring plan.
• Longer repayment options: You can pay back a USDA direct loan over 33 years, instead of the traditional 30. If you’re considered a “very low-income applicant,” you may qualify for a 38-year repayment term.

Details on the cons

• Guarantee fee and annual fee: USDA guaranteed loans charge an upfront guarantee fee at closing (typically 1%), which can be financed into the loan. These loans also have an annual fee, typically 0.35% of the remaining principal balance, divided across your 12 monthly payments for the year.
• Restrictions on housing location: You can only use a USDA loan in eligible areas, which are mostly rural. 
• Closing may take longer: USDA loans typically take between 30 and 45 days to close, but can sometimes take up to 60 days. The extra time could put you at a disadvantage in a bidding war, when the seller is motivated to close fast.
• Limited eligibility: Not everyone can qualify for a USDA loan. If your income is too high, a USDA loan is not an option, even if you’re buying a property in an eligible area.

USDA loans vs. other types of mortgage loans

Here’s how USDA loans stack up against Federal Housing Administration (FHA) loans, Veterans Administration (VA) loans, and conventional loans.

How to apply for a USDA loan

The loan application process varies by type of USDA loan.

Guaranteed

Browse the USDA’s list of active lenders to find loan providers offering guaranteed loans. Always compare multiple home lenders before committing to one, then follow their application process.

Direct

To apply for a USDA direct loan, visit the Single Family Housing Direct Home Loans webpage and select your state from the drop-down. You can view a list of state-specific certified loan application packages, which include the forms to complete as part of your application in your area.

Alternatively, you can request an application package from the Rural Development Agency online or pick one up at a local office. You can also apply online via RDApply.