What Is a USDA Loan? Benefits, Requirements and More

A USDA loan removes some of the most common barriers to homeownership, making it easier for borrowers in rural areas to purchase a house.

These loans are guaranteed or issued by the U.S. Department of Agriculture (USDA) and do not require a down payment or private mortgage insurance. Additionally, USDA home loans typically have lower interest rates than conventional mortgages.

“A USDA loan is a government-backed home loan that allows low- to moderate-income households to get up to 100% financing for their primary residence,” says Brett Schiffer, chief credit officer at CrossCountry Mortgage.

The USDA loan program is run by the Department of Agriculture’s Rural Development sector, which focuses on improving economic opportunities and the overall quality of life in rural communities across the country. As part of this initiative, the department guarantees and grants loans to promote homeownership in these areas.

USDA loans have strict borrower and property eligibility requirements, including limitations on household income size and property location. “The USDA may distribute these loans directly to low-income borrowers, though it’s more common for USDA loans to be administered through partner mortgage lenders,” says Schiffer.

USDA home loans include guaranteed mortgages issued by private lenders and direct loans that the USDA issues itself. Existing homeowners may also qualify for loans and grants for home repairs and renovations. 

The USDA’s Single Family Housing Guaranteed Loan Program is intended for borrowers with a moderate income in rural areas. The program helps private lenders provide 30-year, fixed-rate loans that the USDA guarantees.

If a borrower defaults on a guaranteed loan, the USDA will reimburse the lender for up to 90% of the loan amount. To qualify, you must be unable to get a conventional loan without PMI and meet other eligibility criteria.

The USDA issues fixed-rate loans directly to homebuyers through its Single Family Housing Direct Home Loan Program. These loans are designed to help low- and very-low-income buyers find housing in qualifying rural areas. However, there are location-based limits to how much you can borrow.

A direct loan from the USDA typically has a 33-year term (although some individuals may qualify for a loan term of up to 38 years). To be approved for a USDA direct rural housing loan, you must be otherwise unable to obtain a mortgage.

The USDA offers home improvement loans and grants through its Home Repair Program. The maximum loan amount is $40,000, repaid over a 20-year term at a 1% interest rate. A grant of up to $10,000 is also available and can be combined with a loan for up to $50,000 to fund home renovations. 

Homeowners who receive a grant through this program must repay it if the property is sold within three years.

• Income limits: To qualify for a guaranteed loan, your income cannot exceed 115% of your area’s median household income (exact limits vary by location and household size). You can check your income eligibility on the USDA’s website. For a direct loan, you must be a low- or very-low-income borrower with an income below the USDA’s limits for your county and household size.

• Residency requirement: USDA home loans require you to occupy the home as your primary residence. You must also be a U.S. citizen or legal permanent resident.
• Location: USDA loans are available in eligible rural areas (as defined by the department). The USDA eligibility tool can help you see which parts of the country fall into this category.
• Credit score: The USDA doesn’t have a minimum credit score requirement. However, USDA-approved lenders often prefer a score of at least 620.
• Debt-to-income ratio: To qualify for a USDA direct or guaranteed loan, you should have a debt-to-income ratio of 41% or less.

A USDA loan allows you to buy a house with no money down, which can be especially useful for first-time homebuyers and those who don’t have the 3% down payment requirement that’s typical for many conventional loans. 

However, if you can put some money down, a lender may view you as less of a risk. This could help you secure a better interest rate on a guaranteed loan.

Because all USDA loans have a fixed interest rate, you’ll know exactly how much your mortgage loan payment will be for the entirety of your loan. This makes it easier to budget for other expenses and understand the total interest you’ll pay over the course of your mortgage.

Additionally, USDA loans usually have lower interest rates than conventional mortgages: 

• According to Freddie Mac, the average interest rate on a 30-year, fixed-rate conventional loan is 6.91% (as of the first week of January 2025).
• The interest rate on USDA direct loans is 4.375% (as of December 1, 2024). With payment assistance subsidies, this rate can dip as low as 1%. 
• Lenders determine rates on USDA guaranteed loans, but they tend to be lower than conventional loan rates. A strong credit history and low debt-to-income ratio will help you get the best rate.

Although USDA loans don’t require private mortgage insurance (or the mortgage insurance premium that’s associated with FHA loans), there are other fees to be aware of. A loan that’s guaranteed by the USDA currently has an upfront guarantee fee of 1% of the loan amount, and an annual fee of 0.35%. Depending on your lender, these fees may be paid out of pocket or rolled into your mortgage.

If you’re interested in a home loan that the USDA guarantees, ask your real estate agent about lenders they have worked with in your area. You can also explore the list of approved lenders on the USDA website to find one near you. 

If you want to apply for a USDA direct loan, you’ll do it through your local USDA Rural Development office. You can find yours and more about the application process on the USDA website.

USDA loans provide a path to homeownership for low- and moderate-income borrowers in rural parts of the country. With no down payment necessary and lower interest rates than conventional mortgages, these loans can be a smart option for financing your next home. 

To learn more about these loans, explore the Single Family Housing Programs on the USDA website. You can also contact a USDA-approved lender to get personalized advice for your situation or begin your USDA-guaranteed loan application.