What a USDA loan is

A USDA loan is a mortgage backed by the U.S. Department of Agriculture that lets you buy a home in a rural area with little or no money down. The USDA does not lend the money itself — a bank or mortgage lender does — but the USDA guarantees the loan, which means if you stop paying, the government covers the lender's loss. This may provide lets lenders offer mortgages to borrowers who might not may have access to for a conventional loan because they have a smaller down payment, a lower credit score, or a shorter work history.

The main trade-off is location. You can only use a USDA loan to buy a home in a designated rural area. The USDA updates these zones yearly, and some suburbs near cities do may have access to even though they feel urban. You also cannot use a USDA loan to buy a second home, investment property, or a home you plan to rent out — it must be your primary residence, the place where you live most of the year.

Key Takeaways

  • USDA loans require zero down payment in most cases, which is the main advantage over conventional mortgages that typically ask for 3 to 20 percent down.
  • The property must be in a USDA-designated rural area, which you can check on the USDA website before you start house hunting.
  • You must intend to live in the home as your primary residence; you cannot use a USDA loan to buy a rental property or vacation home.
  • The USDA charges a may provide fee (a one-time insurance cost) and an annual fee, both of which get rolled into your monthly payment.
  • Income limits vary by county and family size, so a USDA loan may not be available to higher-income households even if they meet other requirements.

How the USDA may provide works

When you get a USDA loan, the lender takes on the risk of lending to you, but the USDA takes on some of that risk in return. If you default — stop making payments for several months — the lender can foreclose on the home and sell it. If the sale does not cover what you owe, the USDA pays the lender the difference, up to a set amount. This safety net is why lenders are willing to offer zero-down mortgages to borrowers they might otherwise turn away.

You pay for this may provide through two fees. The may provide fee is a one-time cost, usually 2 to 3.6 percent of the loan amount, charged when you close. The annual fee is roughly 0.35 to 0.55 percent of the loan balance each year. Both fees are typically rolled into your monthly payment rather than paid upfront, so you do not need cash on hand to cover them. Over the life of a 30-year loan, these fees add up, but they are still often cheaper than the private mortgage insurance (PMI) you would pay on a conventional loan with a small down payment.

Income and property limits

USDA loans are designed for rural homebuyers of modest means, so the program caps how much you can earn. The income limit depends on your county and the size of your household. A family of four in one county might have a limit of $90,000 per year, while the same family in another county might have a limit of $110,000. The USDA publishes these limits by county, and your lender can tell you the exact number for your area before you explore.

The property itself also has limits. The home cannot cost more than a set amount, which varies by county and is usually between $250,000 and $350,000, though some high-cost rural areas allow higher prices. The home must also meet USDA property standards — it has to be safe, sanitary, and in decent repair. A home that needs a new roof or has mold will not pass inspection. If the home fails, you can ask the seller to make repairs before closing, or you can walk away.

Credit score and debt requirements

The USDA does not publish a minimum credit score, but most lenders want to see a score of at least 580 to 620. If your score is lower, some lenders will still work with you, but you may pay a higher interest rate. If you have had late payments, collections, or a bankruptcy in the past, you will need to explain what happened and show that your finances have stabilized since then.

The USDA also looks at your debt-to-income ratio, which is the percentage of your monthly income that goes toward debt payments. Most lenders want this ratio to be no higher than 41 to 43 percent. If you have car loans, credit card balances, student loans, or other debts, they all count toward this number. A lender will add your projected mortgage payment to your existing debts and divide by your gross monthly income to calculate the ratio.

The process and closing process

To start, you find a lender that offers USDA loans — not all banks do, so it is worth calling ahead. You will need to provide proof of income (recent pay stubs and tax returns), a list of your debts and monthly payments, your credit authorization, and proof of citizenship or legal residency. The lender will order a credit report and verify your employment and income with your employer and the IRS.

Once the lender approves you, you can make an offer on a home in a USDA-may be able to access area. The lender will order an appraisal to confirm the home is worth what you are paying. If the appraisal comes in lower than the offer price, you will need to renegotiate with the seller or walk away. The USDA also requires a property inspection to may support the home meets safety and sanitary standards. Closing typically takes 30 to 45 days from the time you are approved.

USDA loans versus conventional mortgages

The biggest difference is the down payment. A conventional loan usually requires 3 to 20 percent down, while a USDA loan requires zero down in most cases. This means you can buy a home without saving tens of thousands of dollars first. However, conventional loans do not have income limits or property location restrictions, so if you earn above the USDA cap or want to buy in a city, a conventional loan is your only option.

Conventional loans also do not require an annual fee, though they do charge private mortgage insurance (PMI) if you put down less than 20 percent. PMI typically costs 0.5 to 1.5 percent of the loan amount per year and stays on your loan until you have paid off 20 percent of the home's value. USDA fees are usually lower than PMI over time, but the comparison depends on your specific loan amount, interest rate, and how long you keep the loan.

What happens if you move or sell

A USDA loan is tied to the property, not to you. If you sell the home, the new owner cannot assume your USDA loan — they would need to get their own mortgage. You can pay off the loan early without penalty, which means if you sell the home for more than you owe, you keep the difference. If you move but keep the home and rent it out, you are violating the terms of the loan, and the lender can demand full repayment when ready.

If you move to a new home, you can explore for a new USDA loan if the new property is in a USDA-may be able to access area and you still meet the income and debt requirements. There is no limit to how many USDA loans you can have over your lifetime, but you can only have one active USDA loan at a time.

Frequently Asked Questions

Can I use a USDA loan to buy a home in the suburbs?

Some suburbs may have access to as rural under USDA rules, but many do not. The USDA updates its may be able to access areas yearly, and you can check whether a specific address qualifies on the USDA website or by asking your lender. If the address is not may be able to access, you cannot use a USDA loan for that property, even if it feels rural to you.

What if my income is slightly above the limit?

Income limits are firm — if you earn above the cap for your county and household size, you do not meet the requirement. However, some types of income do not count toward the limit, such as certain disability payments or child support you receive. Ask your lender whether any of your income sources might be excluded.

Do I need a down payment at all?

In most cases, no. However, you do need to cover closing costs, which typically run 2 to 5 percent of the loan amount. Some sellers will agree to pay part or all of your closing costs as part of the purchase agreement, which lets you close with no money out of pocket. Your lender can tell you what closing costs to expect in your area.

Can I get a USDA loan if I have bad credit?

It depends on how bad. Most lenders want a credit score of at least 580 to 620, but some will work with lower scores. Late payments, collections, and bankruptcies make approval harder but not impossible — you will need to explain what happened and show that your finances have improved since then.

What if the home fails the USDA inspection?

You have a few options. You can ask the seller to make the repairs before closing. You can negotiate a lower price to account for the repairs you will make yourself. Or you can walk away and look for a different home. The seller is not required to make repairs, so if they refuse and you want the home, you would have to pay for the work yourself.