What Is a USDA Loan and What Should You Know?

A USDA loan is a government-backed, no money down mortgage for buyers and homes in less-dense parts of the country. USDA mortgage rates are government-assisted, which means buyers get access to lower interest rates and payments than with other government-backed programs like FHA and VA.

USDA stands for United States Department of Agriculture. The agency is best known for its work with farming, forestry, and food. It also promotes home affordability and strong communities in rural and suburban areas. 

91% of the United States is within the USDA mortgage boundary, so if you plan to buy a home that’s not in an urban area, consider using the USDA’s home loan for first-time buyers.

This article covers everything first-time home buyers need to know about USDA loans.

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USDA Mortgages In 90 Seconds Or Less

A Brief History of USDA Loans

The USDA mortgage program, also known as the USDA Rural Development Guaranteed Housing Loan Program, started after World War II, in 1949, as part of the American Housing Act.

The government knew from its housing policies that helped end the Great Depression that homeownership builds and strengthens U.S. communities and creates jobs that generate tax revenue for states and municipalities.

It launched the USDA housing program to create similar opportunities in rural and suburban areas. USDA mortgages make homeownership more attainable and affordable for low- to moderate-income earners. 

The program offers below-market interest rates and lets buyers buy homes without making a down payment or paying mortgage insurance.

Today, the USDA supports hundreds of billions of dollars in home loans; and strengthens neighborhoods and communities all over the country.

How Does a USDA Loan Work?

USDA loans behave like other mortgage loans. They have a loan size, an interest rate, and a payback length. There is no prepayment penalty with a USDA loan, and most mortgage lenders offer USDA mortgages to home buyers.  

What makes USDA loans different is that the U.S. Department of Agriculture guarantees its loans against non-payment and loss. Mortgage lenders take less risk when issuing USDA-guaranteed loans than other loan types. 

Because of the guarantee, lenders give USDA loans at ultra-low interest rates.

USDA mortgage rates can be up to 0.50 percentage points below comparable low-down payment loans such as HomeReady, HomePossible, and Conventional 97. They’re lower than VA mortgage rates in most instances, too.

See today’s mortgage rates.

How Does The USDA Define Rural?

The USDA mortgage program supports housing, community development, and economic growth within rural communities. 

To many Americans, rural is an abstract concept embodied by farmland, rolling hills, and wide-open landscapes. To the U.S. government, rural means something different.

By statute, and first defined by Section 520 of the Housing Act of 1949, a rural community is any community that satisfies these requirements:

• Community with fewer than 2,500 residents not linked to a major city
• Community rural “in character” with less than 10,000 residents
• Community with less than 20,000 residents not related to a metropolitan statistical area

Any community that is not rural is, by definition, an urban community. The USDA doesn’t make separate definitions for suburban and exurban communities. All U.S. homes are either rural or urban.

In 2020, the Census Bureau added additional criteria for census tracts to distinguish between rural and urban areas. 

A rural census tract meets the following criteria:

• Fewer than 2,000 housing units or 5,000 people
• Fewer than 500 residents per square mile
• Not more than 425 housing units per square mile
• Not within a half-mile radius of an airport with 2,500 passengers or more per year

Homes in rural communities or rural census tracts are USDA mortgage-eligible.

How Do You Qualify for a USDA Loan?

To qualify for a USDA loan, home buyers must meet the Department of Agriculture’s geographic and income eligibility standards, plus other mortgage qualifications.

Eligible home buyers must:

• Purchase property in a rural census tract
• Earn a low or moderate household income
• Show an average history of on-time bill payment
• Be a U.S. citizen or permanent resident alien
• Complete a certified homeownership education course online or in-person

The USDA enforces income limits for its home buyers. Limits are listed on the USDA website. For more information, consult your mortgage lender, or ask us in the chat.

Home buyers must also be purchasing a modest primary residence. The USDA mortgage program is unavailable for vacation homes, rentals, and commercial purposes such as housing a business or retail store.

USDA mortgages are available as 30-year fixed-rate mortgages only. There are no adjustable-rate USDA mortgages.

Click to get a USDA mortgage pre-approved.

2023 USDA Eligibility Map

You can find an interactive eligibility map on the USDA website. Choose your loan type—most first-time buyers use Single Family Housing Guaranteed—and enter your exact address. You will also find income limits and eligibility information in the results area.

USDA Loan Types & Variations

The USDA supports three mortgage programs for home buyers: Guaranteed Loans, Direct Loans, and Home Repair Loans. 

The majority of first-time home buyers use the Guaranteed Loan program.

1. The USDA Guaranteed Loan Program

The official name of the USDA Guaranteed Loan program is ​​Section 502 Single Family Housing Guaranteed Loan Program. It accounts for 90 percent of USDA loans made each year. 

The USDA Guaranteed Loan program is the catch-all USDA mortgage program. It allows for 100% financing without mortgage insurance and lets buyers come to closing with no money whatsoever.

Section 502 Guaranteed Loans are available through mortgage lenders, brokers, and retail banks. USDA loans require a 640 credit score or better.

2. The USDA Direct Loan Program

The ​​Section 502 Single Family Housing Direct Loan Program is the least common and most limiting of the USDA housing programs, representing just four percent of USDA loans made in recent years.

USDA Direct Loans are so named because they’re issued by the USDA directly and not through conduits such as lenders or banks. The agency reserved Direct Loans for low- and very-low-income households who cannot get their mortgage approved elsewhere. 

The government subsidizes and pegs Direct Loan interest rates; since January 3, 2023, rates have been 4.25 percent. In addition, Direct Loan mortgage terms extend to 38 years which minimizes monthly payments. 

Many program participants participate in ongoing credit counseling as a condition of mortgage approval.

3. The USDA Home Repair Loan Program

The USDA Section 504 Home Repair program makes loans up to $40,000 to help elderly, disabled, and low-income homeowners maintain the safety and livability of their homes.

USDA Home Repair loans term for 20 years at a fixed interest rate of 1%. They’re for existing homeowners only.

Loan Trait	USDA Guaranteed Loan	USDA Direct Loan
Where to Apply	Mortgage Companies	USDA RD Office
Financeable Fees	1% Guarantee Fee Only	All Loan Fees
Target Customers	Up to Moderate-Income Households	Low- and Very-Low- Income Households
Interest Rate	Market Interest Rate	3.75%
Loan Terms	30 Years	33 or 38 Years
Annual Fees	0.35% of Loan Size	$0
Max Loan Size	No Limit	Up to $776,600
Minimum FICO	640	640 or Lender Discretion
In-Ground Swimming Pools	Allowed	Not Allowed
Upfront Loan Fee	1% of Loan Size	$0

For eligible home buyers, USDA mortgages often offer the best combination of interest rate, monthly cost, and down payment. They’re also a flexible option for buyers with less-than-perfect credit.

If you’re buying a home in a rural U.S. community, consider the USDA rural housing loan.

USDA loans don’t require a down payment

The USDA mortgage program allows for 100% financing on all homes in all communities. Home buyers aren’t required to make a down payment and can buy a home with no money down. 

USDA mortgage rates are ultra-low

Mortgage rates for the two USDA mortgage programs – the Guaranteed Loan program and the Direct Loan program – are nearly always lower than mortgage rates for comparable low- and no-down-payment loans, including HomeReady, Home Possible, and the VA mortgage loan for active duty military and veterans.

Click to get today’s USDA mortgage rates.

USDA mortgages don’t require mortgage insurance

The USDA doesn’t require a 20 percent down payment and won’t charge mortgage insurance, which can add an effective one percent or more to your annual interest rate. Instead, the USDA charges a one-time, 1% guarantee fee at closing and an additional 0.35 percent per year.

Buyers can buy a USDA home with $0 out of pocket

Home buyers who use USDA-backed mortgages can purchase a home with no money out of pocket whatsoever. USDA guidelines allow buyers to add their guarantee fee, closing costs, and loan fees to their loan amount, even above 100% of the home’s purchase price. The USDA also permits seller concessions to minimize the cash required to close.

USDA mortgages are assumable

USDA mortgages include an assumption clause, which means that a future buyer of your home can buy your home and your mortgage simultaneously, with the same interest rate and loan terms. Assumable mortgages can raise a home’s resale value when interest rates rise because the home’s payment is locked to yesterday’s mortgage rates. 

Buyers can access the USDA Streamline Refinance program

The USDA Streamline Refinance is an automated mortgage rate reduction program for homeowners with existing USDA mortgages. To get approved, USDA homeowners must show they’ve paid their mortgage on time for the last 12 months; and that the refinance results in a $50 savings per month or more. There is no employment verification or home appraisal needed.

USDA Mortgage Statistics

The majority of the United States’ landmass is rural. Homes in rural communities are eligible for 100% USDA Section 502 financing. 

According to the U.S. Census Bureau:

• 64% of the U.S. rural population lives east of the Mississippi River
• States with the highest rural population: Vermont and Maine (61%)
• State with the lowest rural population: California (4.9%)
• 0.6% of U.S. counties have no rural population
• In 2021, rural populations grew faster than urban populations (0.3% vs. 0.1%)

In addition, the rural population concentrates in the South. 

46.7 percent of the U.S. rural population lives in the South Region, including Alabama, Arkansas, Delaware, Florida, Georgia, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia, Washington, D.C., and West Virginia.

Here are some USDA Guaranteed Loan statistics from a recent active loans report:

• 56.3% of USDA homeowners are single / not married
• The typical USDA mortgage borrower is 37 years old
• The average household income for USDA homeowners is $52,478
• The typical household size for USDA homeowners is 2.3 people
• The typical square footage of a USDA-mortgaged home is 1,445 square feet
• The average USDA mortgage loan size is $127,406
• The average USDA home buyer makes a 2.12% down payment
• 72.6% of USDA home buyers are moderate-income earners, per USDA classification
• 25.6% of USDA home buyers are low- or very-income earners, per USDA classification

The USDA also reports that 82.0% of USDA home buyers are first-time home buyers.

Click to pre-approve a USDA mortgage.

What’s the Difference Between USDA and FHA Loans?

USDA and FHA-backed loans are both low down payment loan options for first-time home buyers backed by a government agency. They both offer protection to mortgage lenders, too. The USDA guarantees loans against default, and the FHA insures loans against the same.

Furthermore, USDA and FHA loans are for primary residences only – no vacation or rental homes allowed. 

In many other ways, USDA and FHA loans differ, including their down payment, income, and credit score requirements. 

Some key differences include the following:

• USDA mortgages allow home buyers to put less money down
• USDA mortgages require fewer upfront and ongoing fees
• USDA mortgages are limited to 1-unit homes

This table highlights the differences between USDA and FHA-endorsed mortgages.

Loan Trait	USDA Mortgage	FHA Mortgage
Minimum Down Payment	0%	3.5%
Maximum Loan Size	No Maximum	$472,030
Target Customers	Rural Home Buyers	Low-Credit Home Buyers
Mandatory Fees	1% + 0.35% Per Year	1.75% + 1.05% Per Year
Eligible Properties	1-Unit Homes	1-4 Unit Homes
Geography	Rural Areas Only	Rural & Urban Areas
Minimum Credit Score	640 or Lender Discretion	500
Maximum Income	115% of Area Income	No Maximum
Loan Terms	30 Years Only	30 Years or 15 Years

Common Questions About USDA Mortgages 

Why is the USDA mortgage called the “rural loan”?

USDA loans are known as rural loans because they serve low-density communities and areas of rural character, which include suburban and exurban communities.

Can I use the USDA loan to purchase a working farm?

USDA loans aren’t for buying working farms and other commercial entities. USDA loans are for residential properties only.

Can I use a USDA mortgage to purchase a manufactured home?

Home buyers can use USDA mortgages to finance a manufactured home.

Can I use a USDA mortgage to buy a modular home?

Home buyers can finance a modular home with the USDA loan program.

Can I use a USDA mortgage to purchase a condo?

Yes, home buyers can finance condominiums using the USDA mortgage program.

What are the credit score requirements for a USDA mortgage?

The USDA recommends that home buyers have a decent history of paying their bills and give discretion to mortgage lenders to decide whether buyers are credit-eligible. Mortgage lenders may enforce credit score minimums of 580, 600, 620, 640, or 660.

Click to get a USDA mortgage pre-approved.

Can I use the USDA mortgage and make a downpayment?

Yes, although the USDA allows for 100% financing with no down payment, buyers can make a down payment of any size. 

How much can I borrow with a USDA mortgage?

The Rural Housing Development Home Loan program has no USDA loan limits. Home buyers can mortgage as much as their household income and monthly debts can support. 

How do I know if the home I’m buying is eligible for a USDA mortgage?

All homes in rural communities are eligible for the USDA Section 502 mortgage. Use the lookup map to find eligibility for a specific home or property. You may also ask us to find a home’s eligibility in the chat.

Can I convert my home with a USDA mortgage to an Airbnb or VRBO short-term rental property?

USDA loans are for primary residences. Homes cannot be converted into short-term rental properties.

Are USDA mortgages only for first-time homebuyers?

The USDA mortgage program is available to first-time and repeat home buyers.

How much are USDA mortgage closing costs?

Closing costs for a USDA loan vary by mortgage company and by state. Closing costs are generally between 1-2% of the loan size. To reduce closing costs, use a no closing cost mortgage.

What are USDA mortgage rates?

USDA mortgage rates fluctuate daily with mortgage market conditions. However, because the USDA guarantees its mortgages against loss, mortgage lenders can offer lower interest rates for USDA loans than conventional and FHA loans.

Who is eligible for a USDA mortgage?

USDA mortgages are available to home buyers who purchase a primary residence in a non-urban area and whose household income does not exceed the average household income for the area. 

How do I apply for a USDA mortgage?

Home buyers can apply for a USDA Guaranteed Loan online with a mortgage company or in person at a bank’s branch office. Direct Loans for very-low-income borrowers require a direct application with the USDA.

What are the income limits for a USDA mortgage?

The USDA mortgage program is limited to low- and moderate-income households. Income limits vary by county and household size. Households with five or more members receive higher income limits than households with four members or fewer. Use the USDA eligibility map to verify your income eligibility.

Is there a minimum or maximum property size requirement for a USDA mortgage?

The minimum allowable home size for USDA home loans is 400 square feet for manufactured properties. There is no maximum property size for USDA mortgages. 

Can I use a USDA mortgage to purchase a multi-family property?

No, USDA mortgages are for single-family residences only. Multi-family homes require a different mortgage program, such as FHA or conventional home loans.

How long does it take to get approved for a USDA mortgage?

Pre-approved USDA mortgages can move to approval status in minutes. Mortgages that are not pre-approved may take extra time. 

What documentation do I need to provide to apply for a USDA mortgage?

USDA mortgages require home buyers to verify sources of income, assets, savings, credit scores, and employment history. Buyers may submit documentation digitally or as hard copies. 

Can I get pre-approved for a USDA mortgage?

Get started with your USDA mortgage pre-approval here.

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