Am I eligible for a USDA loan and what is it?

USDA loans allow eligible homebuyers to get zero-down-payment mortgages in rural areas.

These loans, supported by the U.S. Department of Agriculture, offer lower interest rates and more lenient credit standards compared to conventional mortgages. Additionally, they do not necessitate private mortgage insurance, which can increase your loan cost by over 2% annually.

To buy a property within specified areas, you must meet certain income requirements and research mortgage lenders that issue USDA loans.

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What is a USDA loan?

A mortgage option that allows low- and moderate-income buyers in rural areas to purchase a home with no down payment, called a USDA loan, aims to help them become homeowners.

USDA-guaranteed loans are provided by approved banks and mortgage lenders, while the Department of Agriculture also issues mortgages, but USDA direct loans have stricter income requirements and set interest rates.

USDA loans are more affordable than conventional mortgages because the government assumes the financial risk. On June 26, 2024, the average interest rate on a conventional 30-year mortgage was 7.48%, while the average interest rate on a USDA guaranteed loan was 6.69%, according to the St. Louis Fed. The federal government sets the interest rate for USDA direct loans at 4.75%.

The USDA offers loans and grants for home repairs and improvements at a fixed interest rate of 1%.

How to qualify for a USDA loan

While USDA loans have attractive benefits, they also have stringent eligibility requirements

Income requirements

To be eligible for a USDA guaranteed loan with a private lender, your household income must not exceed 115% of the average median income (AMI) in the county where you plan to purchase a home. The limit is 80% AMI for a USDA direct loan and 50% for repair loans and grants.

You can check the AMI in your area on the USDA website.

Property requirements

To determine if a house is eligible for a loan to buy a primary residence in a USDA-approved rural area, you can use the USDA property eligibility map and type in the address. This includes towns and small suburbs with a population of 35,000.

Credit requirements

To qualify for a USDA direct loan, you don't need to meet credit score limits. However, if you're applying for a USDA guaranteed loan from a private lender, they may require a credit score of 640 or higher. Additionally, USDA-approved lenders prefer a debt-to-income ratio of 41% or less and your monthly mortgage payment, including interest and taxes, should not exceed 29% of your monthly income.

USDA loan limits, terms and fees

The USDA does not set loan limits for mortgages from private lenders. If you're working directly with the USDA, the maximum loan amount in most of the U.S. is $398,600, but some high-cost areas have higher caps. You can use the USDA's area loan limit map to determine the limit in your location.

Homeowners aged 62 and above may be eligible for an additional home improvement grant of up to $10,000 on top of the maximum USDA repair loan amount of $40,000.

While USDA guaranteed loans are 30-year fixed-rate mortgages, direct loans have a term of 33 years, which may be extended to 38 years. USDA repair loans have a term of 20 years.

USDA guaranteed loans have two main charges, but USDA direct loans do not come with any fees.

The USDA sets a percentage fee that functions like mortgage insurance, which is paid upfront. For 2024, this fee is 1% of the total loan amount. If your USDA loan was for $150,000, your total amount would be $151,500.
The annual fee for 2024 has been set at 0.35% of the total loan, which amounts to approximately $44.19 added to your monthly mortgage payment for a $150,000 loan.

The Urban Institute reported that the average monthly cost of private mortgage insurance in March 2024 ranged from 0.46% to 1.5% of the loan total.

Best for bad credit

Guild Mortgage approves USDA loans with credit scores as low as 540, lower than the 640 required by most lenders. It also accepts nontraditional credit history, like rent or utility payments, for borrowers with thin or nonexistent credit records. Although it has received high praise for customer service, including an A+ from the Better Business Bureau and the second-highest score in J.D. Power's 2023 U.S. Mortgage Servicer Satisfaction Study, Guild Mortgage performed poorly in a J.D. Power survey on the mortgage origination process.

In 2024, Guild Mortgage was recognized as one of the top lending partners by the USDA.

Best for availability

Flagstar Bank, one of the largest mortgage servicers in the US, offers USDA loans in all 50 states. Although it has only physical branches in nine states, its user-friendly website provides personalized rates and an online application portal. Borrowers can complete most of the closing process on their mobile device or desktop.

Best for first-time buyers

The PNC Bank website offers a Home Insight Planner that provides new house hunters with a comprehensive financial assessment and recommends homes within their budget range. Additionally, the website includes a tracker feature to help manage the application process and facilitate secure communication with the loan officer.

PNC offers a $5,000 grant to low-income borrowers who qualify for a USDA direct loan, which can be used towards closing costs or other prepaid fees.

Best for mortgage refinancing

Pennymac does not provide USDA purchase loans but offers a USDA mortgage refinance program that can reduce your monthly payment without requiring an appraisal or inspection.

Refinancing with a streamlined assist refinance from PennyMac could save you over $50 a month in principal and interest, including the annual guarantee fee. For an eligible $165,000 mortgage, refinancers could save an additional $2,877 in upfront fees.

In 2024, the USDA named Pennymac one of its top lending partners.

USDA loans pros and cons

Although USDA loans have many benefits, they also have their disadvantages.

Pros

USDA loans are government-backed, reducing lenders' risk and making them more accessible to first-time homebuyers with limited savings.
Lower rates: Interest on USDA loans is substantially lower than conventional mortgages.
USDA loans have flexible credit requirements, with lenders considering creditworthiness and debt-to-income ratio, but not adhering to a specific credit score or DTI.
A conventional loan may require private mortgage insurance (PMI) to exceed 2%, which must be paid until the homeowner has 20% equity in their property.
No prepayment penalty: USDA loans do not charge homeowners a fee for paying off their mortgage early to make up for lost interest.

Cons

Direct loans are only available to borrowers with an income of no more than 80% of the median in their region.
Rural homes meeting minimum property requirements are the only ones eligible for USDA loan approval.
Borrowers must pay both an initial fee and an annual charge for loans, unlike mortgages which include mortgage insurance.
The underwriting process for a USDA loan typically takes longer due to the need for lenders to verify income and property eligibility, as well as the requirement for a USDA appraisal of the home.
A USDA mortgage can be refinanced, but a home equity loan is not available.

Is a USDA loan a good idea?

If you meet the income and property requirements, USDA loans offer a lower interest rate, allowing you to skip the down payment without paying mortgage insurance or showing substantial cash reserves.

The USDA loan plan aims to facilitate homeownership for low-income Americans by offering more flexible credit requirements compared to conventional loans.

How to apply for a USDA loan

Check the USDA website's income eligibility chart to determine if you are eligible for a loan.

To obtain a USDA loan, you must locate a lender that offers these loans and then submit the necessary documentation, such as proof of income, bank statements, and other paperwork.

If you're not approved for a mortgage from other lenders, you can apply for a USDA direct loan through the USDA's Rural Development office.

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