What is a USDA Home Loan?

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Points of Interest

If you’re buying a home in a rural area, a USDA home loan may be the best mortgage option for you, but there are some pretty stringent income requirements you’ll need to meet.

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The USDA Rural Development program offers mortgages to homebuyers in rural areas and suburban areas. Potential homeowners who are buying in a rural area may be eligible for favorable terms with a USDA-backed mortgage. These loans are an excellent fit for borrowers with low incomes who could benefit from having lower interest rates and no down payment.

USDA home loans

USDA loans are offered through the Rural Development program, which incentivizes homeownership in rural and suburban areas. The USDA’s definition of rural includes many suburban areas as well, meaning some homes will qualify even if they’re closer to a more metropolitan area. USDA loans are geared toward low-income applicants and interest rates can be as low as 1% in some cases. As a bonus, there is no down payment requirement with USDA loans, so borrowers don’t need to have cash saved up to become homeowners.

However, mortgage insurance premiums are required for USDA loans, including a 1% upfront guarantee fee and a .35% annual fee. USDA home loans are only available as 30-year fixed-rate mortgages, so homebuyers looking for shorter terms or adjustable rates are out of luck.

The USDA also places limits on the amount applicants can borrow. These limits vary by county and be as high as $600,000 in more expensive areas. However, most counties have a maximum loan limit between $200,000 and $400,000.

Who is eligible for a USDA home loan?

Borrowers who have credit scores of at least 640 will have the easiest time applying for USDA loans, though borrowers with lower credit scores or no credit can still qualify in many cases. USDA loans do have an income requirement, but it’s not like the income limits for conventional loans. With USDA loans, borrowers are required to be low- or moderate-income earners, and borrowers who make more than 115% of the median household income in their area are not eligible. The income limit will vary depending on where the house is located.

In addition, most borrowers will need to demonstrate steady income and two years’ worth of employment history to qualify for a USDA mortgage. The home being financed must also be a primary residence, not an investment property or vacation home.

Pros and cons

Pros

  • Borrowers with lower credit scores or no credit at all can qualify
  • Interest rates can be as low as 1% with subsidies
  • No down payment required

Cons

  • Mortgage insurance is required for all USDA loans
  • Limited by geography and income
  • Maximum loan amounts can limit the house purchases that qualify

The final word 

USDA mortgage loans can make homeownership a reality for rural and suburban homebuyers, and they’re especially ideal for low-income buyers. USDA home loans have the advantage of an easier credit approval process and low interest rates, along with no down payment requirement. These loans do require extra mortgage insurance premiums, though, and the geographic limitations may not make USDA home loans the best choice for buyers in metro areas. However, rural homebuyers are likely to benefit significantly from the perks that come with a USDA loan.

Rayna Perry

Personal Finance Copywriter

Rayna Perry is a Personal Finance Copywriter at Interest.com and a Public Relations major at the University of Georgia. When not writing about personal finance, she is usually watching a great movie or creating a new playlist.