What Is a USDA Loan and How Can I Qualify?

If you're buying a home in a rural area, it could pay to apply for a USDA loan instead of a conventional loan. Here, we'll explain how USDA loans work, highlight the differences between USDA and other types of mortgages, and help you discover whether a USDA loan is right for you.

What is a USDA loan?

A USDA loan is a mortgage that's available for borrowers with up to 115% of the median income in specific designated rural areas. With a USDA loan, you're eligible for a $0 down payment. These loans are backed or issued by the U.S. Department of Agriculture and are designed to help improve rural areas' local economies. Keep reading to understand if a USDA loan is right for your home purchase.

How does a USDA loan work?

USDA loans apply when you're buying a house in a rural area. Usually, the USDA issues loans for homes that are 2,000 square feet in size or less and that have a market value below their areas' respective loan limits (those limits vary by location). The USDA tends to favor loan applicants who have the greatest need for assistance -- meaning, candidates who are in need of safe housing, are unable to secure a conventional loan, or have an adjusted income at or below the low-income limits for where they live.

However, moderate-income applicants are also considered, so long as their income is below 115% of the median income in their area. Check with the best mortgage lenders in your area to see if you qualify. You may be pleasantly surprised.

How do I qualify for a USDA loan?

The requirements for a USDA home loan vary by location. To determine the income limits where you live, you can check this table from the USDA. Click on your state on the first page, and then look for your county to find the information specific to your area.

To qualify for the USDA loan program, you must:

• Purchase a home that's intended to be your primary residence
• Be a U.S. citizen or have permanent residency
• Apply for a loan with a monthly mortgage payment (including principal, interest, insurance, and taxes) that does not exceed 29% of your monthly income
• Have total monthly debt payments that don't exceed 41% of your income (though you may get away with a higher debt-to-income ratio if your credit score is above 680)
• Have a steady source of income for one to two years, depending on requirements
• Have 12 months where no credit accounts became delinquent and were put into collections

What are the types of USDA loans?

There are three types of USDA loan programs:

1. Loan guarantees: The USDA guarantees a mortgage offered by a local lender, similar to how an FHA loan or VA loan works. With this type of loan, you may qualify with no money down, but you'll then need to pay a mortgage insurance premium.
2. Direct loans: These loans are issued by the USDA itself for low-income applicants. They can have mortgage interest rates as low as 1%.
3. Home improvements loans and grants: These give homeowners money that doesn't need to be repaid and is to be used to update their homes. These packages can amount to up to $40,000 for loans and $10,000 for grants. The two can be used together.

How to apply for a USDA loan

Applying is easy with these steps.

1. See if you qualify

You can consult the table linked above to see what income limits look like based on where you live and are looking to buy. At the same time, check your credit. Ideally, you should aim for a credit score of 640 or above for an easier time qualifying. Also, check your credit reports to make sure there are no red flags that would disqualify you, like an overdue debt in collections. 

2. Figure out how much of a mortgage you can afford

The last thing you want to do is get in over your head and take on a mortgage that's too high. Look at your budget and figure out what you can afford -- use our monthly mortgage payment calculator to estimate the cost of different types of mortgages. You can also consult our beginner's guide to home loans, which not only reviews different mortgage types, but also explains what goes into a mortgage payment.

USDA mortgages don't require a down payment. Still, if you receive a down payment gift from a generous friend or family member, you're welcome to use it for up to 100% of your down payment. (Not all mortgage types allow this.)

3. Shop around for a great offer

It's always a good idea to seek out multiple mortgage offers rather than settle on the first one you get. Contact a few different USDA mortgage lenders to see what rates you qualify for.

With a USDA loan, you could become a homeowner with little or no down payment, so it pays to see if one of these mortgages is right for you. And if you don't qualify immediately, you may want to work on making yourself a better loan candidate by dealing with delinquent debt or waiting until you've been at your job for at least two years. Though there are other mortgage types that let you buy a home with a minimal down payment, it's worth doing what you can to take advantage of a USDA mortgage if you're buying in a rural part of the country.

Still have questions?

Here are some other questions we've answered:

• How to Refinance a USDA Home Loan: USDA Mortgage Refinancing
• Mortgage Types: Conventional, FHA, USDA, VA, Jumbo & More
• How to Get a Mortgage