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What Is A USDA Loan?
Author’s Note: This post is modified September 28, 2023 to include 1,131 new mortgage zones added to the 2024 USDA eligibility map, 36 areas removed from USDA eligibility, and to reflect the updated new USDA mortgage guidelines.
A USDA loan is a 100% mortgage for buyers and homes in non-urban 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 loans and VA loans.
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.
The USDA Eligibility Map shows that 91 percent of the United States is within the USDA boundary, so if you plan to buy a home 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.
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 program was modeled after two prior housing programs – the FHA loan and the VA loan – from which the government learned that homeownership builds and strengthens communities, creates new jobs for Americans, and generates additional state and local tax revenue.
The USDA housing program focuses on affordable homeownership in non-urban areas for low- and moderate-income earners. The program offers below-market interest rates and lets buyers buy homes without making a down payment or paying mortgage insurance to their lenders.
Today, the USDA supports hundreds of billions of dollars in home loans.
How Does a USDA Loan Work?
USDA loans work like other mortgage loans. They start with a loan size, an interest rate, and a payback period and eventually pay down to zero. USDA loans don’t have prepayment penalties, and most mortgage lenders offer USDA mortgages to buyers.
USDA loans differ from other mortgages because the loan’s sponsor – the U.S. Department of Agriculture – guarantees USDA loans against default. Therefore, mortgage lenders assume less risk when making USDA-guaranteed loans than other loan types.
Because of the USDA guarantee, lenders offer USDA mortgages with 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. Rates are lower than for VA mortgages, too, in most instances.
The USDA borrows its definition of “rural” from Section 502 of the Housing Act of 1949, which states that a rural community is a 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
Non-rural communities are categorized as “urban.” There is no government definition for suburbs or exurbs. 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.
Search On A USDA Eligibility Map
The government’s USDA Eligibility Website can be challenging – see for yourself!
So, to make it easier for buyers to find USDA mortgage eligibility, Homebuyer.com made a user-friendly USDA mortgage eligibility map that anyone can use free of charge.
The Homebuyer.com USDA Eligibility Map gives instant USDA eligibility status for every U.S. household and USPS address. The map is updated regularly. It reflects changes at the U.S. Department of Agriculture and within Census Bureau data.
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.
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 directly by the USDA, 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 November 1, 2023, rates have been 5.00 percent, and they’ll move to 5.25 percent on December 1, 2023. In addition, Direct Loan mortgage terms extend to 38 years, minimizing 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
4.125%
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.
Consider the USDA rural housing loan if you’re buying a home in a rural U.S. community.
USDA loans don’t require a down payment
The USDA mortgage program allows 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.
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.
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.
USDA and FHA-backed loans are 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
General Home Buyer
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, Typically
500, Typically
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.
Can I get a USDA mortgage after a Chapter 7 bankruptcy?
New for 2024, home buyers with a Chapter 7 bankruptcy in their credit history can apply and get approved for a USDA mortgage after a 3-year waiting period after their discharge date.
Can I get a USDA mortgage after a Chapter 13 bankruptcy?
New for 2024, home buyers with a Chapter 13 bankruptcy in their credit history can apply and get approved for a USDA mortgage after a 12-month waiting period after their debt restructuring plan elapses.
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.
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 enforces a maximum loan size by county, called the USDA Loan Limits. Home buyers can mortgage as much of their homes as their household income and monthly debts support within these limits.
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 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.
The Homebuyer.com mortgage rates shown on this page are based on assumptions about you, your home, and the state where you plan to purchase. The rate shown is accurate as of , but please remember that mortgage rates change without notice based on mortgage bond market activity.
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