What Are USDA Loans And Who Can Get One?

Miranda Crace

7 - Minute Read

UPDATED: Mar 31, 2023

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*As of July 6, 2020, Rocket Mortgage is no longer accepting USDA loan applications.

Rural living is something you may have thought about for a variety of reasons. Perhaps you are looking for a home that gets you away from the bustle of the city – and noisy neighbors – while simultaneously getting you closer to nature. On the other hand, you may have considered something off the beaten path simply to expand your search boundaries for your new home.

Either way, if you need to get a mortgage to purchase a rural – or even not-so-rural home – a low-interest, no-down-payment USDA loan might be an attractive option. If you qualify, you may save money or get in a home faster with this type of mortgage, offered through the U.S. Department of Agriculture’s Rural Development program. 

While Rocket Mortgage doesn’t participate in the USDA home loan program at this time, we’re committed to giving future homeowners the most comprehensive information available to help guide them along the path to homeownership.

In that spirit, let’s take a look at what USDA loans are, who qualifies for the program and other relevant information.

What Is A USDA Loan?

If you’re already looking to buy a home in a rural area, you may have heard of the USDA home loan.

Through its Rural Development program, the USDA supports more remote communities in a variety of ways. The Rural Development loan initiative helps create a sustainable housing market that provides safe, modern homes for those who live in less urban areas.

The advantages of using a USDA loan to buy a home are numerous. Eligible moderate- and low-income home buyers can get a low-interest, no-down-payment-required loan at a favorable interest rate through approved lenders that are familiar with these types of loans.

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What Types Of USDA Loans Are Available?

The USDA has two single-family housing programs for home buyers, each geared toward a different group of borrowers. You can find your county’s loan, income and property eligibility requirements by using the USDA’s SFH Guaranteed Lender Lookup Tool.

Single Family Housing Guaranteed Loan Program 

This program is designed for low- and moderate-income wage earners. Guaranteed loans are financially advantageous loans that are available to home buyers who can’t secure adequate housing through conventional financing. This USDA loan program is a zero-down home loan made available to those who don’t meet conventional loan requirements.

It’s important to be aware that USDA Guaranteed loans come from the private lender rather than the government. Lenders are willing to loan to borrowers they’d otherwise be reluctant to take a chance on, because the government backs the loan against a possible default.

Single Family Housing (SFH) Direct Loans

These loans are intended for low- and very low-income households, and the income levels are defined as a percentage of the area’s median income, as described below. The SFH Direct Loan program helps provide payment assistance to qualifying buyers who lack safe and sanitary housing and are looking to become homeowners.

What Determines USDA Eligibility?

To qualify for a USDA loan, you and the home you hope to buy must meet certain USDA loan requirements. Let’s take a look at some of them below.

Income Limits

Income limits are percentages of the Area Median Income (AMI) per household. To find income limits where you live, use Fannie Mae’s Area Median Income Lookup Tool. Here are the income limits for the SFH Direct and SFH Guaranteed loan programs:

  SFH Direct SFH Guaranteed

Very low income

Below 50% of AMI

Not available

Low income

50% – 80% of AMI

Not available

Moderate income

Not available

Up to 115% of AMI

Property Eligibility

To qualify for a USDA loan, eligible home buyers can choose from any of the USDA’s rural-designated areas. Many of these areas are more suburban than rural, so you may have a wider range of choices than you thought possible with a USDA loan.

What Are USDA Loan Credit Requirements?

Being eligible for a USDA loan isn’t the same as being approved. In addition to meeting the USDA’s requirements, you’ll have to meet a lender’s requirements. The USDA home loan program leaves the approval decisions to the approved list of lenders with whom they partner.

Most lenders require borrowers to have a credit score of at least 640 to be approved for a USDA home loan, but it’s possible in some cases to be approved with a lower score.

Pros And Cons Of USDA Loans

Although they offer clear advantages for those who are eligible, USDA loans have some requirements that are strict and strictly enforced. A good example is USDA appraisal requirements, which can both solve and pose unique problems at the home appraisal stage.

Let’s take a closer look at some of the pros and cons of these loans. 

Pros

There’s a lot to love about USDA loans. Here are a few examples.

A No-Down-Payment Option

USDA loans remove a huge barrier for many moderate- and low-income applicants by providing a zero-down-payment option. Be aware, however, that borrowers who take advantage of this option will have to pay interest on the entire purchase price of the home, and they’ll be starting out with no home equity.

If you’re in a stable housing situation, you may want to consider holding off on purchasing a home until you can save up for at least a small down payment. However, if you don’t have a suitable housing arrangement and don’t earn enough to amass any savings, there’s no reason to wait on applying for a USDA loan.

Lower Interest Rates

Even if a low- or moderate-income wage earner could meet the requirements of most conventional loans, they’d likely face higher interest rates than borrowers with more financial resources. However, the government backing of USDA loans greatly reduces lender risk and allows lenders to issue these loans at more favorable rates.

Availability To First-Time And Repeat Home Buyers

Some home-buying assistance programs are specifically geared toward first-time home buyers, but USDA loans can be ideal for both first-time and repeat buyers. So, it won’t be to your disadvantage if your USDA loan isn’t your first home loan. However, you should check the U.S. Department of Housing and Urban Development (HUD) database of local home-buying assistance to find resources that might be available if you’re a first-time home buyer.

Cons

Of course, as with anything, USDA loans have some drawbacks to consider.

Appraisal Issues That Come With Ensuring Home Safety

While a USDA loan may remove one appraisal issue, it can introduce another.

USDA loans follow HUD appraisal requirements that often include additional testing to ensure the home is a safe and healthy one. A lender’s appraisal focuses on what they’ll be able to get in the case of a mortgage default.

However, these additional requirements can create risks – or at the very least, inconvenience – throughout the appraisal and home inspection process. For sellers able to choose from among multiple offers, there’s no reason to take a chance on an offer not backed by a USDA-loan approval letter.

Your appraisal’s requirements may depend on where the property is located and safety risks commonly associated with the area. Your USDA lender or local real estate agent can guide you on local health and safety testing requirements.

Fewer Lenders To Choose From

Because of the appraisal problems that rural housing can create, many lenders have stepped away from USDA loans, which require a particular expertise. Here’s a list of USDA-approved lenders by state.

Upfront And Annual USDA Guarantee Fees

With a USDA loan, you’ll have to pay what’s known as a guarantee fee. This is the USDA counterpart to private mortgage insurance. The guarantee fee consists of an upfront fee and an annual fee that the borrower pays as part of their monthly mortgage payment.

For 2022, the USDA charges an upfront fee of 1% of the loan amount and then an annual fee of 0.35% of the loan balance.

USDA Loan Vs. FHA Loans

FHA loans are another type of government-insured home loan that’s popular with low- and moderate-income wage earners who might be unable to meet traditional credit requirements. These loans also use HUD standards for health and safety testing, so appraisal issues will be comparable to USDA loans.

Credit Requirements

While most USDA lenders require a minimum credit score of 640, many lenders approve FHA loans for borrowers with a credit score of 580 or more and the required 3.5% down payment. Some lenders will approve applicants with a credit score as low as 500 if the borrower can offer a 10% down payment.

Down Payment Requirements

Even a minimum down payment can be a tough hurdle for some to overcome, and the no-down-payment option is a major advantage of using a USDA loan. To qualify for an FHA loan, you’ll need at least 3.5% of the purchase price for a down payment. However, down payment assistance programs can help.

Remember, though, that if you’re looking for a low down payment option, you can get a conventional loan with only 3% down. Many people think a 20% down payment is required, but that’s a myth based on the traditional 20% down payment to avoid PMI premiums.

Mortgage Insurance Premium (MIP) Costs

USDA wins this one, hands down. The USDA mortgage insurance premium, sometimes called a guarantee fee, consists of a 1% upfront MIP fee and an annual 0.35% of the loan amount. In contrast, with an FHA loan, you’ll pay an upfront MIP of 1.75% of the loan amount and annual MIPs on a monthly basis.

Mortgage Loan Flexibility For Rural, Suburban And Urban Homes

You don’t have to limit your home search to designated areas with an FHA loan. You can buy a home wherever you’d like to live. In this way, FHA loans offer far more flexibility than USDA loans.

The Bottom Line: USDA Loans Can Be A Great Choice For Those Who Qualify

If you’re a moderate- or low-income earner yearning for wide open spaces or just a place to call your own, a USDA loan can help make your homeownership dreams come true.

While we can’t provide direct assistance with this type of loan, we can help you achieve your home-buying goals through other mortgage options that may be even more suited for you.

Ready to see which type of mortgage will be best for your financial situation? Apply online now and get the information you need to make the best choice for you.

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Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University where she studied PR Writing, Film Production, and Film Editing. Her creative talents shine through her contributions to the popular video series "Home Lore" and "The Red Desk," which were nominated for the prestigious Shorty Awards. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.