What Is a USDA Loan? A Beginner’s Guide to Rural Homeownership

Buying a home in a rural area doesn’t mean you need a large down payment or perfect credit. In fact, some buyers may qualify for a zero-down mortgage backed by the U.S. Department of Agriculture — known as a USDA loan.

This guide explains what a USDA loan is, how it works, who qualifies, and how it compares to other government-backed mortgage programs.

What Is a USDA Loan?

A USDA loan is a government-insured mortgage designed to help low- to moderate-income households buy a home in eligible rural or suburban areas. These loans offer unique benefits, including:

• No down payment required

• Low interest rates

• Reduced mortgage insurance costs

USDA loans are offered through private lenders and backed by the USDA, making homeownership more accessible to those who might not qualify for a conventional mortgage.

Types of USDA Loans

There are two primary USDA loan programs: Guaranteed and Direct. While both aim to expand rural homeownership, they work a little differently.

USDA Guaranteed Loan

• Issued by approved lenders (like banks or credit unions)

• Backed by the USDA

• Designed for moderate-income borrowers

• More flexible on credit and underwriting

• Most common USDA loan type

USDA Direct Loan

• Funded directly by the USDA

• For low- or very-low-income applicants

• Stricter eligibility requirements

• Subsidized interest rates available

• Typically used when no other financing is available

Check out the USDA income and property eligibility map to see if your location qualifies.

Key Benefits of a USDA Loan

Whether you’re a first-time buyer or looking to relocate to a rural area, this program offers several major advantages:

• Zero Down Payment
  You can finance 100% of the home’s purchase price.

• Low Interest Rates
  Rates are typically lower than conventional or FHA loans.

• Reduced Mortgage Insurance
  Instead of monthly PMI, USDA loans charge a modest guarantee fee.

• Flexible Credit Guidelines
  Many lenders allow scores starting around 620, and manual underwriting is possible.

• No Maximum Loan Amount
  Eligibility is based on income and location — not loan size.

Who Qualifies for a USDA Loan?

Eligibility is based on three core factors: income, location, and property type.

Income Limits

Your household income must fall below 115% of the area median income (AMI). This includes all working adults in the home — not just the borrower.

Example: If the AMI is $80,000, the income cap would be $92,000.

Use the USDA lookup tool to check your county limits.

Rural Location

USDA loans are reserved for properties in rural and select suburban areas — but the definition is broader than you might think. Many small towns, outer suburbs, and even some fringe metro areas qualify.

Primary Residence Only

These loans are for owner-occupied homes only — not investment or vacation properties.

Other Basic Criteria

• U.S. citizenship or permanent residency

• Stable income and employment history (2+ years preferred)

• Acceptable credit history and manageable debts

Related reading: The role of credit scores in mortgage approval

See also: How debt-to-income ratio impacts mortgage approval

USDA Loan Fees and Mortgage Insurance

Instead of monthly private mortgage insurance, USDA loans charge two types of guarantee fees:

• Upfront Guarantee Fee: 1% of the loan amount (usually rolled into the loan)

• Annual Fee: 0.35% of the loan balance (paid monthly)

These fees are lower than traditional mortgage insurance and help fund the program.

How USDA Loans Compare to Other Mortgage Types

How to Apply for a USDA Loan

Applying for a USDA loan involves a few extra steps compared to a traditional mortgage, but the process is still straightforward:

1. Check Your Eligibility
   Use the USDA eligibility map to confirm if your location and household income qualify.

2. Choose a Lender
   Most buyers use a Guaranteed Loan, which is issued by USDA-approved lenders like banks or credit unions.

3. Get Pre-Approved
   Your lender will review your credit, income, and debt-to-income ratio to determine how much home you can afford.

4. Find a Qualifying Property
   The home must be in a USDA-eligible location and meet minimum property standards.

5. Underwriting and USDA Approval
   Once your file clears underwriting, it goes to the USDA for final sign-off — this extra review can add a few days to the timeline.

6. Close on Your Home
   After USDA approval, you’ll finalize the paperwork and close on your home like with any other mortgage.

Potential Drawbacks to Consider

While these loans offer great benefits, they’re not for everyone. Here are a few limitations:

• Location restrictions limit eligibility to rural and select suburban areas.

• Income limits may exclude higher-earning households.

• Longer processing times are possible due to additional USDA review.

• Only primary residences are eligible — no second homes or rental properties.

Frequently Asked Questions (FAQ)