First-time home buyers can get three big benefits from a USDA loan:
- Buying with no money down: Usually, home buyers put at least 3% down, and a lot of buyers need larger down payments to get competitive interest rates. USDA loans require no money down.
- Getting competitive interest rates: Even with no down payment, USDA loans can offer competitive interest rates because they’re guaranteed by the federal government.
- Paying less mortgage insurance than with an FHA loan: Compared to federally insured FHA loans, USDA loans charge lower mortgage insurance premiums.
If you meet the USDA’s geographic and income rules, a USDA Guaranteed Loan could make you a homeowner with less money out of pocket.
What is a USDA home loan?
USDA home loans help Americans in rural and suburban areas become homeowners through two separate loan programs:
- USDA Guaranteed Loans: The USDA insures private mortgage loans for moderate-income buyers in rural areas
- USDA Direct Loans: The U.S. Department of Agriculture lends money directly to low-income home buyers who live in eligible rural areas
This article will focus on the USDA Guaranteed Loan program, which is far more common than the USDA Direct Loan. This program works like most other loan types available to current home buyers.
In a nutshell: private lenders lend money so the borrower can finance a new home purchase. Mortgage payments go to the private lender or loan servicer.
The U.S. Department of Agriculture’s role is to insure the loans, making them more attractive for lenders. The USDA’s end goal is rural development, and these attractive home loan options help spur growth.
USDA loan requirements for 2023
Before you apply for the USDA home loan program, make sure you meet the program’s eligibility requirements:
- Geography: If the city you’re buying a home in has fewer than 10,000 residents, your home should meet the USDA definition of a “rural area.” Unincorporated areas also qualify. Some municipalities with up to 20,000 people will qualify for USDA financing.
- Income: Your household income must fall below the USDA’s limits for your area. The limit is 115% of your area’s median income. If your area’s median income is $50,000, you can’t earn more than $57,500. You can measure your income eligibility using this USDA tool.
- Home characteristics: USDA loans finance primary residences only. USDA loans can finance a manufactured home if it’s brand new.
If you meet both the income and the geographical requirements above, you’re eligible to submit a USDA loan application. However, USDA loan eligibility doesn’t guarantee USDA loan approval.
Getting approved for a USDA loan
The USDA insures loans for moderate-income people who are buying rural housing. But private mortgage lenders underwrite these loans.
To get your application approved, you’ll need to meet your lender’s requirements. These include:
- Credit score: USDA-approved lenders usually look for FICO scores of 640 — higher than the 620 that most conventional lenders require and the 580 FHA lenders can accept. If you haven’t established a credit score yet, your lender may be able to check your rent and utility payment histories instead.
- Debt-to-income ratio: 41% is the maximum DTI allowed by the USDA. This is also more strict than many conventional loans, which top out at 43%, and FHA loans which could go as high as 50% DTI in some cases.
- Employment history: USDA-approved lenders want to see at least two years of steady employment.
If you meet all of those requirements — and if your home purchase price does not exceed the home’s appraised value — you could buy the home with no money down.
Step-by-step guide to getting a USDA loan
To get your USDA home loan, follow these steps:
1. Get preapproved for a USDA loan
The preapproval process shows how your application would perform in a real underwriting process. You’ll get a good idea about your price range and monthly payment size without making any commitments.
It’s smart to get at least three preapprovals since lenders’ rates can vary.
2. Find a home in an “eligible rural area”
USDA Guaranteed Loans typically finance single-family homes in cities and towns with populations of 20,000 or fewer and in unincorporated areas.
Not sure about a property? Enter the address into this map before making an offer on the home.
3. Apply for your loan
After you’ve found a home, made an offer, and gone under contract, it’s time to apply for the USDA rural development loan.
You’ve already compared lender offers in Step 1. Now you can make your application official with one of the lenders. USDA loans offer 30-year terms with fixed rates.
4. Follow your loan officer’s instructions
Your loan officer will guide you through the process of uploading financial data for the underwriting process. Be sure to respond to your loan officer’s request for more information as quickly as possible.
5. Get your own home inspection
The USDA will check out the home you’re buying to make sure it provides minimum safe living conditions. To get a more thorough assessment of the home’s condition, you should hire your own home inspector.
If your inspector finds major structural damage or systemic problems with the home, you may want to look for a different home. You could also ask the home’s current owner to fix the problems.
6. Close the home loan
If you’re happy with the home inspection — and if your lender’s underwriters are satisfied with your financials — it’s time to make the home purchase official.
USDA home loans do not require down payments as long as the home’s purchase price does not exceed its appraised value. But you will need to pay closing costs, which often range between 2% and 5% of the loan amount. For a $250,000 home, closing costs could range from $5,000 to $12,500.
Closing cost or down payment assistance programs in your area may be able to help.
How USDA loans work
A no-money-down mortgage may seem too good to be true, especially in a market where a lot of homebuyers still think they’d need 20% down.
Many first-time home buyers wonder: How can lenders allow no-money-down mortgages while still charging competitive interest rates?
It’s possible because of the USDA’s mortgage insurance. This insurance would compensate the lender after a foreclosure. In short, lenders face less risk, and less risk translates into a better deal for home buyers.
Repeat and first-time home buyers can benefit from the USDA program, as long as they’re buying a primary residence, live in a designated rural area, and earn less than 115% of their area’s median income.
USDA Guarantee Fees
USDA loans aren’t a handout. Home buyers contribute to the cost of their loan’s USDA mortgage insurance. They pay through the USDA’s guarantee fees.
The first guarantee fee adds 1% to the loan amount at closing. For a $250,000 home loan, this upfront guarantee fee would cost $2,500. Buyers can roll this fee into the loan amount and still buy with no money down.
Along with the upfront fee, buyers pay an annual USDA loan fee of 0.35% of the loan amount. For the same $250,000 home, the annual fee would cost $875 — or about $73 a month — during the first year.
This annual fee will be added to your monthly payments for the life of the loan. But the fee gets smaller as the loan balance decreases. Refinancing into a conventional loan later would eliminate this annual fee.
How USDA loan fees compare to other types of mortgages
The USDA’s guarantee fees can be money well spent. They allow you to borrow at competitive interest rates with no down payment — an advantageous route to homeownership.
Plus, other types of loans charge mortgage insurance fees, too.
- FHA loans: Charge mortgage insurance premiums of 1.75% upfront and 0.85% annually. Unless borrowers put 10% or more down, they pay the FHA’s annual fee for the life of the loan.
- Conventional loans: Need no upfront mortgage insurance but require private mortgage insurance (PMI) when borrowers put less than 20% down. PMI normally ranges from 0.5% to 1.5% a year. Buyers can cancel PMI once they’ve built up 20% home equity.
- VA loans: Charge an upfront fee of 2.3% for first-time buyers with zero down and up to 3.6% for repeat buyers. VA loans do not require annual mortgage insurance
Compared to these loan types, USDA loans charge lower fees. Only VA loans, which go to veterans and active duty military service members, can charge less with no money down.
More about USDA loan eligibility
The biggest drawback to USDA loans is that — unlike FHA and conventional loans — not everyone can apply for USDA-insured financing.
But USDA eligibility may not be as difficult as you think. Let’s look at each of the requirements for eligibility.
USDA income limits
What does 115% of area median income really mean?
A family of two is eligible to buy a home in a Seattle suburb area with an annual income of up to $93,450. If you have a family of five and you’re moving to the same area, you can make up to $123,350 a year.
Annual income limits vary by region. For a five-person family, here is the maximum qualifying annual income in other areas:
- San Antonio, TX: $98,650
- Chicago, IL: $115,100
- San Jose, CA: $161,000
- Miami, FL: $106,700
- Richmond, VA: $114,750
As you can see, you can earn a healthy income and still qualify for USDA financing.
USDA credit score requirements
Potential borrowers don’t need to have “good” credit history to get a USDA mortgage loan. Lenders require a credit score of just 640 to qualify.
USDA geographic requirements
A smart first step is to check with a USDA lender on the USDA-eligible area closest to your current residence.
Most lenders, especially those around eligible areas, offer USDA loans. They process all the paperwork and work directly with the U.S. Department of Agriculture to get a loan approved.
USDA loans work for homes in unincorporated rural areas and in small towns with populations of 10,000 or fewer. A lot of municipalities with up to 20,000 can qualify if the area is “rural in nature,” according to the USDA.
But this doesn’t mean you’d need to buy a house that’s located an hour from the nearest grocery store, restaurants, and medical clinics.
In fact, USDA financing can work in the outlying suburbs that surround many of the nation’s biggest cities.
If your current lender does not offer USDA loans, find one that does. Don’t opt for FHA simply because your preferred lender can’t do USDA loans.
USDA first-time home buyer FAQs
Does the USDA require first-time home buyer education?
USDA Guaranteed home loans do not require first-time home buyer education. Even though it’s not required, home buyers can benefit from a brief education course if they’re not already familiar with the mortgage application process. USDA Direct loans — for which the USDA is the lender — do require first-time home buyers to take an education course.
How do I qualify for a USDA loan?
First, make sure you’re USDA loan eligible. This means buying in a small town or unincorporated area and earning 115% or less of your area’s median income. Then, make sure you are eligible as a borrower. It’s best to have a credit score of 640 or higher and a debt-to-income ratio of 41% or lower.
Are only first-time home buyers eligible for USDA loans?
No, any home shopper who’s buying a primary residence — and not a vacation home or investment property — can apply for USDA financing.
What is the maximum amount I can borrow with a USDA loan?
The USDA doesn’t set a maximum for USDA Guaranteed Loans. Instead, your lender does. Lenders base maximum loan sizes on borrowers’ ability to repay the loan. Debt-to-income ratio (DTI) and income level affect maximum loan size. The USDA will insure the loan as long as the loan amount doesn’t surpass the appraised value of the home.
How much are closing costs for a USDA loan?
Closing costs vary, but they typically range from 2% to 5% of the loan amount. On a $250,000 loan, closing costs could range from $5,000 to $12,500. The home’s seller, or a closing cost assistance program in your area, may be able to help.
Do USDA home loans require a down payment?
No, USDA loans require no down payment as long as the home’s appraised value is higher than the loan amount. If, for some reason, your purchase price exceeds the appraised value, you’d need a down payment to make up the difference. For example, if the home you’re buying is appraised at $245,000 but you’ve agreed to pay $250,000, you’ll need to make a $5,000 down payment.
What is the minimum credit requirement for a USDA?
Most USDA lenders look for credit scores of at least 640 and debt-to-income ratios of 41% or less.
Do USDA loans have PMI?
No, but they charge a similar fee: the USDA’s guarantee fee. This costs 1% of the loan amount upfront and 0.35% of the loan amount each year. This annual rate is cheaper than most PMI policies which average about 1% per year.
How do I find out whether a property is USDA-eligible?
To find out whether a property is USDA-eligible, enter the home’s address into the USDA’s lookup tool.
Can I buy a foreclosure with a USDA loan?
Yes, if you and the home meet the USDA’s eligibility rules, the USDA will insure a loan on a foreclosed home. Keep in mind the home will need to meet the USDA’s basic requirements for safety and livability. A lot of fixer-uppers don’t meet this requirement.
Check your rates for a USDA mortgage
Average rates for home purchases and refinances have risen back to their historic norms.
Your USDA loan rate will depend on your income, debt, and credit score.
The USDA loan program can offer competitive rates even when you have average credit and no down payment.
That’s one reason USDA loans can be so attractive to first-time home buyers.