If you dream of living in the wide-open spaces of rural America but expect that you’ll have trouble affording a mortgage, then a Department of Agriculture loan could be just what you need to help you buy or build a country home.

What Is a USDA Loan?

The USDA’s mission includes promoting affordable homeownership and a better quality of life in rural areas. One way it fulfills that mission is to guarantee fixed-rate loans with no down payment requirements for low- and moderate-income residents who want to buy, build, or upgrade a home in rural areas. The government guarantee helps protect private mortgage lenders from losses, which encourages them to make loans that they otherwise wouldn’t approve.

USDA rural home loans differ from other government-backed mortgages in that they can only be used to buy rural properties.

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How Do USDA Loans Work?

The USDA has designed rural loan programs for different types of borrowers, including first-time homebuyers. The process behind each of these loan programs varies. Here’s a closer look at how each of these USDA loan programs works.

Guaranteed loans

The Section 502 Guaranteed Loan Program backs loans from approved lenders that meet USDA guidelines. If the borrower defaults, the USDA will cover 90% of the lender’s losses. The guarantee reduces the risk to lenders, and encourages them to offer loans with low interest rates and no down payment.

Direct loans

The USDA also provides loans through its Section 502 Direct Loan Program. The USDA is the lender on these direct single-family home loans, which are reserved for borrowers with low or very low income who otherwise would lack decent, safe, and sanitary housing.

Direct loan applicants also may be eligible for payment assistance. That means the USDA pays a subsidy that reduces the monthly mortgage payment to make the loan more affordable. Although the financial assistance might not last for the duration of the loan term, it can be helpful for borrowers with very low income.

Home improvement loans and grants

Additionally, the USDA offers loans or grants for homeowners to make necessary repairs, home improvements, or upgrades. Eligible homeowners can apply for a grant of up to $10,000, or a loan of up to $40,000. They also can apply for a combination of the two that may total as much as $50,000. Loans are repaid over 20 years with a fixed interest rate of 1%.

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Who Can Get a USDA Loan?

Not everyone will qualify for a USDA loan. Borrowers must meet specific eligibility requirements set by the USDA.

General eligibility requirements

The USDA home loan requirements include:

  • You must occupy the home as your primary residence.
  • You must be a U.S. citizen or a U.S. noncitizen national, or have qualified alien status.
  • You must be eligible to participate in federal programs.
  • You must be unable to obtain a conventional mortgage without private mortgage insurance.

Credit score requirements

The USDA requires no minimum credit score for applicants, though lenders offering USDA loans may have their own requirements. A credit score of at least 640 qualifies a borrower for automatic approval via the USDA’s automated underwriting system.

The USDA allows alternative credit options for borrowers who lack traditional credit, and lenders are encouraged to approve borrowers who have demonstrated a willingness and ability to repay debt.

Income limits

Your household income may not exceed 115% of the median household income for the area in which the home you’re buying is located. The USDA has an online tool to help determine your income eligibility.

You will need to show that your income is reliable. If you have regular employment, you must show one year of income history. If you’re a seasonal worker or self-employed, you need to provide two years’ proof of income.

Additionally, you’ll need a manageable debt-to-income ratio. Your DTI ratio should not exceed 41% of your income. You can figure out your debt-to-income ratio with our free DTI ratio calculator.

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What Type of Home Can I Buy With a USDA Loan?

As a borrower, you’ll need to consider both your eligibility requirements and property eligibility requirements. Although not all homes qualify, understanding the limitations before your house hunt can help you avoid falling in love with an ineligible property.

Property requirements

The property you’re purchasing must meet the following requirements:

  • The home must be in an eligible rural area. You can determine what properties in your area qualify with the USDA’s online tool.
  • You must use the home as a permanent residence. That rules out buying a vacation home or second home.
  • The home must be in good condition. This includes being deemed a safe and sanitary dwelling.
  • No income-producing land is allowed. The land cannot be used as a working farm, an agricultural operation, or other commercial enterprises.
  • The land size must be reasonable. The size of the lot must be typical for the area.
  • The home must have access to a paved road. You will need to buy a property that has direct access to a street, road, or driveway.

Depending on the area, it might be a challenge to find a home that meets USDA loan requirements. Eligible applicants may use a USDA loan to build a new home instead.

How to find a USDA-approved property

If you want to seriously pursue a home purchase with a USDA loan, the USDA’s property eligibility map is an essential tool. You can use the tool to distinguish which areas qualify for USDA home loans.

Another helpful resource is your real estate agent or Realtor. If possible, work with an agent that’s willing to filter out any homes that fail to qualify for the mortgage type of your choice.

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USDA Loan Fees and Costs

A USDA loan could offer the helping hand you need to put down roots in a rural area. But as with all mortgages, there are fees and costs associated with a USDA loan.

Down payment

USDA loans are among the few options that require no down payment. However, if you’re able to put money down, it can ease your path to buying a home. Larger down payments reduce how much you need to borrow, are more likely to earn you a lower interest rate from lenders, and can help you afford a larger or more expensive home.

Closing costs

Buyers must pay closing costs no matter which home loan they choose. Closing costs typically include origination fees, underwriting fees, title search and title insurance fees, appraisal fees, notary fees, and more.

The maximum you can pay for closing costs on a USDA loan is 3% of the total loan amount. So, if you’re taking out a $100,000 mortgage, you could expect to pay up to $3,000 in closing costs.

With a USDA loan, you might not have to pay thousands in closing costs upfront. The program allows you to borrow up to 100% of the home’s appraised value. If the purchase price is less than the appraised value, you may be able to roll your closing costs — including the upfront guarantee fee — into the mortgage and repay them over time.

Guarantee fee

Instead of PMI, USDA loans require guarantee fees. There’s an upfront guarantee fee paid at closing, and an annual guarantee fee paid monthly. For the fiscal year beginning Oct. 1, 2021, the upfront guarantee fee is 1% of the loan amount, and the annual fee is 0.35%. The USDA charges the guarantee fees to the lender, which can pass the costs on to the borrower.

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How To Apply For a USDA Loan

Have you decided that a USDA loan is right for you? Here’s how to apply.

1. Find a lender

You’re required to work with a USDA-approved lender, so as you’re shopping around, make sure to verify that potential lenders provide USDA loans.

To apply for a single-family direct home loan, contact the nearest USDA service center.  

2. Apply for preapproval

Getting preapproval involves submitting preliminary documentation to a lender. You’ll need to provide income statements, bank statements, proof of assets, credit reports, and tax returns. 

Although preapproval isn’t a guarantee that the lender will approve a loan for you, it gives you an idea of what you should be able to afford and is helpful when shopping for homes and preparing to make an offer.

3. Close on a USDA-approved home

Once your offer is accepted by a seller, you move on to closing. The time it takes to close will vary. Your lender will appraise the property and finalize the terms of your mortgage, and the home will be inspected. You’ll pay the closing costs, and after the loan is funded and the paperwork is signed, you’ll own the home.

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Is a USDA Loan Right for You?

Now that you know more about USDA loan requirements, it’s time to decide if it’s the right loan type for you. Here are some pros and cons of USDA loans.

Pros and cons of USDA loans

Every mortgage product has advantages and disadvantages. Here’s what to know about USDA loans:

USDA Loan Pros and Cons

No down payment requirement.Location limits.
Lenient credit requirements.No home-based businesses.
Useful opportunity for rural homebuyers.Low- to moderate-income borrowers only.

USDA vs. FHA loans

Loans guaranteed by the Federal Housing Administration are another mortgage option for homebuyers. Here’s how FHA loans differ from USDA loans:

Comparing USDA Loans and FHA Loans

USDA loansFHA loans
Interest rates are usually lower.Mortgage insurance fees.
No PMI.No location restrictions.
Location restrictions.Low down payment requirements.

USDA vs. conventional loans

Conventional loans don’t come with any government backing for lenders. Because of that, the requirements for borrowers are usually a bit more stringent. Here’s how conventional loans differ from USDA loans:

Comparing USDA Loans and Conventional Loans

USDA loansConventional loans
Guarantee fee.PMI if you put less than 20% down.
No PMI.No location restrictions.
Location restrictions.Low down payment requirements.

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Here are answers to common questions about USDA loans.

How long do USDA loans take?

he loan from when the USDA issues its conditional commitment. That extra time may be needed if you run into delays. There’s also an opportunity for a one-time, 90-day extension.

Can I refinance my USDA mortgage?

Yes, you can refinance your mortgage if you have a USDA loan. You’ll have the ability to refinance the loan to another USDA loan or a conventional loan. If you want to stick with a USDA loan and close quickly, the USDA streamline refinance lets you refinance without a new home appraisal or home inspection.

Why does the USDA offer rural development loans?

The USDA offers rural development loans to help low-income families buy a home, and hopes to promote prosperity and improve the quality of life for people living in rural communities.

What’s the maximum USDA loan amount?

The maximum loan for USDA mortgages varies based on your location. For example, the loan limit for all counties in Alabama was $336,500 as of March 2022. But the limit in Butte County, California, was $403,600.

Where can I find a USDA loan lender?

You can find a list of approved lenders on the USDA’s website. But don’t forget to shop around for the best rates.

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The Bottom Line on USDA Loans

USDA loans offer a way for qualified borrowers with lower income or nontraditional credit to afford buying a safe and sanitary home in rural areas. For those aspiring buyers, understanding how USDA loans work — and how to qualify — is the first step on the path to owning a home in the country.