USDA home loans are one of the least-known — but most powerful — home buying options in today’s market. These loans require zero down payment. That means you can buy a home even though you don’t have a lot of money saved up. USDA loans also come with ultra-low rates and low credit score minimums.
USDA mortgage eligibility
USDA loans are typically available to those who meet the following qualifications:
- Geographic — Must purchase a home in a USDA-eligible rural area (most areas outside major cities are eligible)
- Income limits — Household income must be at or below 115% of the area’s median income
- Credit score — A credit score of 640 or higher is typically required (although some lenders may accept lower scores with compensating factors)
- DTI — A debt-to-income ratio of 41% or less (higher DTI may be acceptable with compensating factors)
- Work history — 1-2 years of consistent employment history. Two years typically required if self-employed
- A qualifying home — The home you’re buying must meet USDA property standards and serve as your primary residence — not a vacation home or investment property
Most of these are general guidelines, and home shoppers should get a full qualification check and pre-approval letter from a USDA lender. Many buyers are eligible, but don’t know it yet.
How does a USDA loan work?
A USDA loan is a home loan backed by the U.S. Department of Agriculture as part of its Rural Development Guaranteed Housing Loan program.
“Backing” a mortgage means insuring the lender. If a USDA loan borrower defaults, then USDA will protect the lender from taking huge losses on the loan.
With this kind of insurance behind a borrower, lenders can offer competitive loan rates while requiring no down payment. This helps fulfill USDA’s goal of increasing homeownership for lower-income buyers in rural areas.
To help fund the USDA loan program, borrowers pay for mortgage insurance. This comes in two separate parts:
- USDA guarantee fee — 1% of the loan amount. This fee is technically due at closing but most borrowers finance it into the loan amount instead
- USDA annual fees — 0.35% of the loan amount due each year. This fee is divided into 12 installments and collected as part of the loan’s monthly payments
The USDA backs mortgages only in designated rural areas and only for borrowers with low to moderate income. Borrowers must fall within household income limits for their household size and location.
USDA-eligible areas
USDA’s geographic requirement might sound restrictive. After all, not everyone wants to own a home in a rural area.
In reality, though, USDA’s definition of ‘rural’ is pretty loose. About 97% of the U.S. land mass meets the USDA’s standard for a “rural area.” Many suburban as well as rural neighborhoods qualify.
If you are buying outside a major city, it’s worth checking into your area’s USDA eligibility status.
USDA mortgage calculator: Fees and definitions
The above USDA mortgage calculator details costs associated with USDA loans or with home buying in general. But many buyers don’t know why each fee exists. Below are descriptions of each cost.
Home price
Home price is the amount you agree to pay for the home. The home’s listing price isn’t necessarily the home’s purchase price. You can negotiate with the seller to agree on a home purchase price.
Principal and interest
This is the amount of each loan payment that goes toward paying off the loan balance plus the interest due each month. This remains constant for the life of a fixed-rate loan. Along with principal and interest, each mortgage loan payment also includes other costs such as property taxes and home insurance.
Property tax
The county or municipality in which the home is located charges a certain amount per year in real estate taxes. This cost is split into 12 installments and collected with each monthly mortgage payment.
Your lender collects this fee because the county can seize a home if property taxes are not paid, thus causing a loss for the lender. The calculator estimates property taxes based on averages from tax-rates.org.
Homeowners insurance
Lenders require you to insure your home from fire and other damages. This fee is collected in monthly installments as part of your mortgage’s monthly payment. Then, the lender sends the payment to your insurance company each year. After you pay off your mortgage you’ll need to pay annual homeowners insurance premiums directly to the insurer.
HOA/other
If you are buying a condo or a home in a Planned Unit Development (PUD), you may need to pay homeowners association (HOA) dues. Lenders factor in this cost when determining your debt-to-income ratio. You may put other home-related fees such as flood insurance in this field, but don’t include things like utility or maintenance costs.
USDA mortgage insurance
The U.S. Department of Agriculture charges an annual mortgage insurance fee which is paid in 12 equal installments along with the mortgage payment. The fee is equal to 0.35% of the loan amount per year. The fee is much lower than FHA mortgage insurance premiums (MIP) or even most conventional loan private mortgage insurance (PMI) rates.
Upfront USDA fee
The USDA charges an upfront guarantee fee which is rolled into the loan amount. The amount of the fee is currently 1.0% of the loan amount. The fee defrays the costs of running the USDA loan program.
The agency is able offer these loans at discounted rates and down payments in part because of this fee. This fee is lower than the upfront funding fee charged on VA loans, but VA loans do not require ongoing mortgage insurance.
Loan term
The number of years it takes to pay off the loan on schedule (assuming no additional principal payments). Currently, USDA’s only option is a 30-year, fixed-rate loan.
Down payment
This is the dollar amount you put toward your home cost. USDA requires no down payment, but buyers can make a down payment if they desire. Down payments can come from a down payment gift or eligible down payment assistance program.
Interest rate
The mortgage rate your lender charges. Shop at least three lenders to find the best loan rate.
USDA loan program FAQs
USDA and FHA loans each have pros and cons. Generally, FHA loans work better for people with lower credit scores. However, FHA loans require at least 3.5% down while USDA loans can offer zero down payment. Unlike USDA loans, FHA does not set geographic or income limits.
Yes, USDA can lower the barriers to homeownership by offering no down payment loans and less stringent credit requirements compared to conventional loans — all while still offering competitive loan rates.
No, but many do. USDA — like FHA and VA — is a widely used mortgage program.
No, but your mortgage underwriters will cap your loan size based on your credit profile and ability to make payments.
In most cases you need a FICO score of 640 or higher to get USDA loan approval. However, some lenders can make exceptions, especially if you have a low debt-to-income ratio (DTI). Be sure to check your credit report before applying so you can dispute inaccurate credit data which can pull down your score.
You’d need to pay off the loan or refinance it to a non-USDA mortgage. Refinancing into a conventional loan lets homeowners stop paying mortgage insurance premiums if they own at least 20% of the home’s value as equity.
No. The USDA loan program requires borrowers move into the home within 60 days of closing and use it as a primary residence throughout the loan term.
A USDA guaranteed loan means the U.S. Department of Agriculture will insure your lender against financial losses if you default on the loan. This insurance — funded in part by the mortgage insurance premiums borrowers pay — helps the lender offer more competitive rates to borrowers.
More about USDA loans
Learning about USDA loans is easy. See our USDA loan guide for everything you need to know about the program. Additionally, see our other articles on this powerful loan program.
- The USDA loan process
- USDA income lookup tool
- Eligible areas
- USDA down payment and closing costs
- Minimum credit scores
- USDA vs FHA: Which is better?
Apply now for a USDA loan
Few home buyers have heard of the USDA loan program. And those who have may assume USDA loans are only for farms or homes that are too far removed from civilization.
On the contrary, USDA mortgages are for regular homes in small towns and suburbs, and for people with moderate income.
Check your eligibility with a USDA-approved lender. You may be able to become a homeowner sooner than you thought possible.
Sources:
Property tax averages: http://www.tax-rates.org/taxtables/property-tax-by-state
USDA fees: https://www.rd.usda.gov
http://www.freddiemac.com/research/insight/20180417_consumers_leaving_money.page
By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.