What Is a USDA Loan

Apr 10, 2023 | Mortgage Guides

What Is a USDA Loan?

Are you an aspiring rural homeowner looking for a way to finance your dream house? If so, consider a USDA loan. 

Backed by the United States Department of Agriculture (USDA), these home loans are available to borrowers purchasing properties within eligible suburban areas. Thanks to the affordable rates and lack of a down payment requirement, such mortgages can be an attractive option for low-to-moderate-income families seeking homeownership.

The following guide will discuss USDA loans in detail. Continue reading for helpful tips for first-time home buyers and to learn more about USDA loans, including how they work, who is eligible, and the necessary steps to apply for one.

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A Basic Understanding of USDA Loans

A USDA or Rural Development (RD) loan is a government-insured option offered by the U.S. Department of Agriculture. This agency is renowned for its farming, food, and forestry efforts. However, it also encourages strong communities and affordable housing in rural locations.  

These loans, in particular, are designed to be an option for folks looking to purchase homes in less-dense areas underserved by conventional lenders. A USDA loan is fantastic for those needing a no-money-down mortgage with lower interest rates than other government-backed programs like FHA and VA. While the eligible locations may sound restrictive, over 90 percent of the U.S. area map is suitable for USDA loans.

The History of USDA Loans

The USDA Rural Development Guaranteed Housing Loan Program was established in 1949 as part of the American Housing Act. Housing policies played a pivotal role in ending the Great Depression, and the government hoped these loans would do the same in the aftermath of World War II. 

The USDA believed that more families attaining homeownership in rural areas would strengthen communities, create jobs, and bring tax revenue to state and local governments. Today, the USDA provides home loans totaling hundreds of billions of dollars and works to improve rural communities’ quality of life nationwide.

What Are the USDA Loan Types?

The three USDA-supported mortgage programs for home buyers are Direct Loans, Guaranteed Loans, and Home Repair Loans. 

  • USDA Direct Loans: Also known as the Section 502 Single Family Direct Homeownership Loan Program, USDA direct loans are issued by the USDA. Although the least common, this program offers low-income applicants mortgage rates as low as one percent.
  • USDA Loan Guarantees: Section 502 Single Family Guaranteed Homeownership Loan Program allows participating lenders to provide low-rate loans with no money down. This program is the more popular option, available through local lenders, mortgage brokers, banks, and credit unions.
  • USDA Home Repair Loans and Grants: Elderly, disabled, and low-income homeowners looking to make improvements to their property may qualify for the Section 504 Home Repair Loan Program. USDA loans up to $40,000 and grants capped at $7,500 are available to maintain a home’s safety and livability.

Who Should Consider a USDA Loan?

The USDA has several restrictions that prevent many house shoppers from qualifying. Still, these loans can benefit eligible borrowers. Several examples of who a USDA mortgage is most ideal for include:

  • Borrowers whose income falls short of the local median income restrictions set by USDA.
  • Those who lack the funds for a conventional mortgage down payment. 
  • Home buyers are interested in houses in rural neighborhoods or manufactured homes to place on rural property.
  • Homeowners interested in refinancing their current USDA loan.

Who Is Eligible for a USDA Loan?

To be considered for a USDA loan, eligibility requirements must be met. For instance, all three programs mandate borrowers to be U.S. citizens, non-citizen nationals, or qualified resident aliens. On top of that, there are further strict conditions regarding property, income, and credit. Following is a summary of such prerequisites:

Property Eligibility 

The most crucial requirement for a house to be financed through the USDA is that it must be located within an approved rural area. These are not associated with or part of an urban location, such as the open country or towns, villages, and other places not adjacent to settled areas. By checking the loan eligibility map on the USDA website, borrowers can determine if their residence is in a region that qualifies for this government-backed funding. 

Another property-related condition is that the borrower must live in the home as their primary residence. 

Income Requirements

Homebuyers in economic need are the target audience for the USDA loan programs. As a result, applicants cannot earn more than a set income cap, which varies by metro region and household size. Most often, one’s adjusted gross income cannot exceed 115 percent of their area’s median income. You may verify your county’s income thresholds and family size using the same property eligibility tool on the USDA website.

USDA-approved lenders will also consider a borrower’s debt-to-income (DTI) ratio. A DTI of 44 percent or lower is recommended, though exceptions are sometimes made. 

Credit Score Requirements

The USDA has no minimum credit score requirement. However, individual mortgage lenders require a score of at least 640. Those just short of that limit may still be eligible. Talk with a USDA-approved lender to discuss your options. 

USDA Loan Limits

USDA loan limits vary based on the borrower’s income, the property’s location, and the household size, among other considerations. In general, there is no restriction on how much money one can borrow to cover the cost of a property’s market value. However, geographical restrictions may apply to some programs. For example, the maximum amount for USDA Direct Loans in 2022 was $336,500 in most areas, while high-cost regions were up to $970,800.

These loan limits are subject to change, so check with the USDA or their lender for the most recent limitations.

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How to Apply for a USDA Loan

​​Applying for a USDA loan follows a similar procedure to other loans, with few exceptions. Nonetheless, contacting a lender and getting pre-approved is the initial step. Then it is time to start house shopping. After the loan processing is complete and the USDA grants approval, closing day is all that stands in the way of becoming a homeowner. 

The general application process follows these three steps:

1. Get Pre-Approved by a USDA Lender

Working with a lender specializing in this rural home program can impact the home-buying process. After deciding on a lender, apply for pre-approval. 

Getting pre-approved gives borrowers a picture of their affordability and also demonstrates to sellers they can follow through on an offer. It is an extensive process that accounts for one’s entire financial situation. During this step, the lender will outline the documentation necessary to qualify. Alas, getting pre-approved does not guarantee approval.

2. Find a USDA-Eligible Home and Sign a Purchase Agreement

With a budget in mind, hire a qualified real estate agent and begin the home search. By working with an experienced realtor, you can discover properties that qualify for USDA funding. 

Home buyers should find an eligible property as long as they have a preapproval letter and know which nearby regions qualify for financing. After finding an ideal home, make an offer. Negotiate with the seller before signing the purchase agreement.

3. Undergo Loan Processing Until Closing Day

After the buyer and seller sign the purchase agreement, the lender will request an appraisal. The USDA mandates appraisals to ensure the house complies with the agency’s regulations. Underwriting for USDA loans is more prolonged than conventional lending as the loan application must be processed by the lender and the government agency. 

Once the creditor and the USDA approve the loan, the borrower will receive a “Clear to Close” notice. Proceeding to close day, the necessary paperwork is signed, and the USDA loan is finalized and ownership of the new home is granted. 

What Are the Costs of a USDA Loan?

Home loans backed by the U.S. Department of Agriculture are fantastic options for low-to-moderate-income families and individuals. Whether it be the low rates, the lack of down payment, or the minimal expenses for mortgage insurance, USDA loans make for an excellent resource. Nevertheless, interested home buyers should consider a few expenses. 

  • Interest Rates: USDA mortgage rates are some of the lowest. Because their government guarantee shields lenders from loss, the USDA offers rates below traditional market levels. A great credit score and low DTI ratio are needed for the best rate. Compare lenders since each sets their rates. 
  • Upfront Guarantee Fee: The USDA requires a homeowner-paid mortgage insurance (MI) premium. This one-time fee equals one percent of the loan. All USDA loans include this charge but can be financed into a mortgage.   
  • Annual Fee: The other MI premium is the Annual Guarantee Fee, which equals 0.35 percent of the amount and can be paid annually or monthly as part of the mortgage payment. 
  • Property Related Expenses: Property taxes, title insurance, and recording fees are a few examples of the potential costs tied to the property.
  • Closing Costs: Lenders, appraisers, and other service providers incur these costs. Depending on the lender, the area, and the loan size, closing expenses may vary but are often between one and two percent of the loan.

The Benefits of USDA Loans 

  • Compared to conventional and FHA loans, interest rates are lower by an average of 0.5 to one percent.
  • Little to no down payment, making them more affordable.
  • A USDA loan has no prepayment penalties. 
  • No-closing-cost mortgages, along with the ability to finance closing costs into the mortgage.
  • While insurance premiums are present, they are often minimal compared to a conventional loan’s insurance. 

The Drawbacks of USDA Loans

  • USDA loans are restricted in terms of availability to properties in specific geographical locations.
  • Income restrictions allow low-to-moderate income level borrowers to take advantage.
  • The USDA home loan programs do not offer adjustable-rate mortgages.
  • Requires mortgage insurance in the form of an upfront and annual fee.
  • Limitations on refinancing include waiting at least 12 months. 


USDA loans make for a desirable option for first-time home buyers seeking an affordable, low-interest mortgage with little or no down payment. These loans are a terrific method for financing homes within suburban areas. However, being familiar with the loan requirements, limits, and costs ahead of time is critical when applying. 

Following this guide will ensure interested borrowers are prepared. For more information or questions about what other products are available, contact a Wesley Mortgage representative today.

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