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What Is a USDA Loan and What Should You Know?

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A USDA loan is a government-backed, no money down mortgage with government-assisted mortgage rates, which means you can get lower rates than with similar government-backed programs like FHA and VA.

USDA stands for United States Department of Agriculture and, although it’s the government agency best known for its work with farming, forestry, and food, it also does work in housing.

Since USDA loans don’t require a down payment, you can borrow as little or as much as you need to buy a home  – as long as that home is in a “rural,” or less densely populated, area.

Rural areas might include the outskirts of town, a place with lots of farmland, or a suburb of a large city — really anywhere that’s not considered “urban.”

91% of the United States is considered rural, so if you’re thinking about homes in less populated areas, you may have access to rates lower than the general home buying population with a USDA loan.

Here’s everything you need to know about USDA loans.

USDA Mortgages In 90 Seconds Or Less

Brief History of USDA Loans

The USDA loan’s story goes back to 1949 with the passing of the American Housing Act.

1949 was post-World War II when U.S. housing was in short supply and millions of families were sharing homes — sometimes willingly and sometimes not.

Meanwhile, economic studies showed that homeownership could help build and strengthen weakened U.S. communities and create jobs that generate tax revenue.

With that in mind, the American Housing Act was born.

The law’s passage cleared the way for millions of new homes to be built nationwide while making it easier for renters to become homeowners.

New mortgage loans were made available by the government. Some loans had waived requirements for a down payment. The USDA mortgage, backed by the U.S Department of Agriculture, was one such loan.

The USDA program thrived and, today, the USDA supports hundreds of billions of dollars in U.S. home loans; and communities all over the country.

How Do USDA Loans Work?

When you get a USDA loan, the U.S. Department of Agriculture guarantees your mortgage to your lender. By doing this, your lender knows that your payment will get made. This provides lower risk to the lender, allowing them to offer lower interest rates with no down payment.

While USDA mortgages allow for 100% financing, you can make a down payment if you want. That down payment can come from you, or be a gift from a charitable organization, parent, grandparent, or another family member.

What Credit Score is Needed for a USDA Loan?

The USDA’s official mortgage rulebook says that home buyers must have a credit score of 640 to get approved, but it will approve home loans for buyers with credit scores below 640, and for buyers with no credit score at all, on a case-by-case basis.

Types of USDA Loans

There are only two types of USDA mortgages — 15-year fixed-rate loans and 30-year fixed-rate loans. No adjustable-rate mortgages (ARMs) are available to home buyers through the U.S. Department of Agriculture’s loan program.

How Do You Qualify for a USDA Loan?

To qualify for a USDA loan, you must follow the eligibility guidelines listed on the USDA website, which are:

  • Be a legal permanent U.S. resident
  • Prove creditworthiness
  • Maintain dependable income
  • Have a household income matching 115 percent of the area’s median income or lower
  • Be the primary residence in a rural area

What’s the Difference Between FHA and USDA Loans?

FHA loans and USDA loans differ in the requirements needed to qualify for the loan. Both are government-backed, but FHA requires a down payment of 3.5 percent, or $3,500 for every $100,000 in your home’s sale price, whereas the USDA requires no down payment.

FHA also has no specific location requirements, whereas the USDA loan requires that your residence is in a rural area.

FHA also has more lenient credit score requirements. They don’t enforce minimum credit score requirements at all, though lenders typically require a 580 minimum, and you can get an FHA approval without a credit score.

Learn more about FHA loans.

Here’s a quick look at the difference in the requirements:

USDA Loans FHA Loans
Residence must be in a rural area No location requirements
No down payment needed 3.5 percent down payment needed
Low credit score required No credit score minimum required
Some income limitations No income limitations

Do You Need to Pay Back a USDA Loan?

Yes, you need to pay back your USDA loan, even if you sell your house or move before your loan gets paid off.

What Are the Benefits of USDA Loans?

While USDA loans might not work for everyone, like those who want to buy a home in an urban area, these loans have many benefits. Here are some of the big ones:

No down payment needed

You don’t need a twenty percent down payment to buy a house, and you haven’t for over 70 years.

If you prefer to buy a house with no money down, the 100 percent USDA home loan could be your best option.

Refinancing is easy

Should mortgage rates drop in the future, homeowners with USDA home loans can refinance quickly and easily through the USDA Streamline Refinance. To get approved, you only have to show that you’ve paid your mortgage on time for the last 12 months; and that the refinance will lower your payment by $50 per month.

Loans can also cover repair costs

USDA loans allow buyers to borrow 100% of a home’s purchase price, plus another $27,500 on top of that for repairs and home improvement. Allowable repairs include replacing a roof, remodeling for accessibility of disabled persons, and for making energy-efficiency improvements to a house.

Are USDA Loans Assumable?

USDA mortgages are assumable, which means they can be transferred to future buyers of your house with the same interest rate.

Imagine selling your house with its current mortgage rate intact five years from now. Your home could be easier to see because of its already-low mortgage rate.

FAQ From Customers in Our Chat

Why is the USDA loan also called a “rural loan”?

USDA loans are also known as “rural loans” because the U.S. Department of Agriculture backs the program, and the program intends to promote homeownership in areas that are lightly populated.

“Lightly populated” includes rural neighborhoods, and in many regions, it describes the suburbs, too. 91% of United States land is within USDA eligible areas.

I have a working farm. Can I use the USDA loan?

No, USDA loans are not available to households with a working farm.

I am buying a new manufactured home. Can I use a USDA mortgage?

Yes, you can use USDA loans to purchase new manufactured homes.

I am buying a modular home. Can I use a USDA mortgage?

Yes, you can use USDA loans to purchase modular homes.

I am buying a condo. Can I use a USDA mortgage?

Yes, you can use USDA loans to purchase condominiums.

What kind of credit rating do I need to use the USDA loan?

USDA mortgage guidelines state that borrowers should have a credit score of at least 640. However, the program allows exceptions for home buyers whose credit scores are below 640.

If I want to make a downpayment, can I still use the USDA mortgage?

Yes, you can make a downpayment using the USDA mortgage program. There is no requirement to finance 100% of your purchase.

What’s the USDA maximum loan size?

Unlike FHA and other government-backed mortgages, there is no maximum loan size in the USDA mortgage program.

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

Every home in the United States is either USDA loan-eligible or not. Use our USDA lookup map to search by area or address, or ask us to find your home’s eligibility for you.

Can I rent my USDA-mortgaged home on Airbnb?

Yes, you can rent your USDA-mortgaged home on Airbnb. However, USDA loans are for primary residences only. You’re allowed to rent a room(s) to travelers and can rent your home at times. However, the house’s address has to be where you live for the majority of the year.

Do I have to be a first-time home buyer to use a USDA mortgage?

No, you don’t have to be a first-time home buyer to use the USDA mortgage program.

What should I expect USDA mortgage closing costs to be?

USDA mortgage closing costs vary by the state in which you live and your lender. However, USDA loan costs are usually lower than other low and no down payment home loans.

What should I expect USDA mortgage rates to be?

USDA mortgage rates are lower than comparable conventional and FHA mortgages. It’s typical for USDA mortgage rates to beat the interest rates of other loan types by as much as 0.50 percentage points.

Final Thoughts

The government gave the USDA authority to create and fund a no-money-down home loan for buyers of homes in less-densely populated areas, including suburban neighborhoods outside of cities and large towns in rural zones. These areas make up more of the map than you may think.

If you consider buying a home with no money down, check to see if the area you are interested in is rural. If it is, you may be eligible for a USDA loan. If not, there are many different home mortgages available with no or low down payments.

We can help you find one that fits your needs.

Get pre-approved for a mortgage today.

Dan Green
Dan Green

Dan Green is a former mortgage loan officer and an industry expert. He's appeared on NPR and CNBC, and in The Wall Street Journal, Bloomberg, and dozens of local newspapers. Dan has helped millions of first-time home buyers get educated on mortgages, real estate, and personal finance. Have mortgage questions? Ask Dan in the chat.

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