USDA Loans

This Page Was Last Updated: September 06, 2022
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What You Should Know

  • USDA loans allow you to receive up to 100% financing to build, buy, or improve a home in eligible rural areas.
  • There's no minimum down payment and no fixed credit score requirement.
  • To qualify for a USDA loan, you'll need to have a household income less than 115% of the national or state median household income.
  • USDA loans provide low-to-moderate households the opportunity to own a home with a low fixed USDA mortgage rate.
  • USDA payment assistance subsidies can reduce your interest rate to as low as 1%.

Current USDA Direct Loan Rate

The current USDA direct loan rate is 3.50%, as of September 1, 2022.

USDA Loans

What is a USDA Home Loan?

A USDA Loan is a mortgage that is insured by the United States Department of Agriculture. This loan was created by the USDA as part of the ‘Rural Development Guaranteed Housing Loan’ program. The main purpose of USDA loans is to provide opportunities to individuals in rural areas to become homeowners. Rural areas account for 97% of the nation’s landmass making this loan available to approximately 60 million people! USDA loans are also eligible for any property type from single-family, multi-family, condominiums, townhouses, and new construction.

What are the USDA Loan Eligibility Requirements?

The USDA loan program has several requirements that need to be met in order to qualify for the mortgage. The USDA loan requirements are as follows:

CriteriaUSDA Requirement
StatusUS Citizen or Lawful Permanent Resident
LocationPopulation < 20,000
Type of ResidencePrimary Residence
Household IncomeHousehold Income < 115% Median Income
Debt RequirementDebt-to-Income (DTI) Ratio < 41%
Minimum Credit ScoreNo Credit Score Requirement

An in-depth description, eligibility calculator, and USDA loan map can be found on the USDA Loan Eligibility page.

Types of USDA Loan Programs

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Three different types of USDA Loan Programs are available:

  1. Loan Guarantees - USDA guaranteed loans are provided by USDA approved lenders which can be banks and other institutions that provide mortgages. This type of loan is similar to the FHA Loan and VA Loan. As these loans are insured by USDA, you can get competitive mortgage rates and put little to no down payment.
  2. Direct Loans - This program is known as the Section 502 Direct Loan Program. These loans are issued directly by the USDA and not lenders, however, it is restricted to low and very low-income households. In this program, the USDA looks at adjusted income where expenses such as childcare and medical expenses are deducted from the household income. The income to qualify is 50% less than the median income of the area, income limits can be checked here. For example, if the median income in your area is $50,000, your annual adjusted income to be considered low-income cannot be greater than $25,000 ($50,000*50%). There are various subsidies available which can reduce mortgage rates to as low as 1%.
  3. Home Improvement Loans - This program is known as the 504 Home Repair Program, it is restricted to low-income families for home improvements or the elderly for the removal of health and safety hazards. The adjusted income is used where childcare and medical expenses are deducted from household income. To qualify, adjusted household income must be less than 50% of the median income in the area. The maximum loan amount is $20,000 and the maximum loan grant is $7,500.

There are also USDA loans that enable individuals to finance the purchase of vacant land, also called land loans. USDA Section 523 loans are available to borrowers who want to build their own home, while USDA Section 534 are available to borrowers who hire a contractor to build their home.

How do I apply for a USDA Loan?

The process of obtaining a USDA home loan is not that different from obtaining a conventional loan, here are the following steps:

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  1. Find a USDA approved lender and pre-qualify for a loan - Finding a USDA approved lender is the first step, it is advised to find a lender that specializes in USDA loans as the process becomes easier as they have the necessary expertise. Once the lender is chosen, the next step is to get pre-qualify. The lender will require only basic information at this stage such as borrowing amount, income, and debt information. This step helps determine how much you can afford and what monthly payments can be made for the life of the loan. The pre-qualification process can be done online but varies from lender to lender.
  2. Pre-Approval Process - This stage is crucial and requires a lot more information as compared to pre-qualification, in this stage the lender will require all your information such as tax returns, debt, income & bank statements, social security, and government ID. This will help calculate the debt-to-income (DTI) ratio which is an important factor in determining eligibility.
  3. Find a USDA Eligible Home - In this stage, you find a home that is eligible for USDA loans, i.e. it meets the necessary rural requirement such as less than 20,000 people in the given area.
  4. Home Sale Process - In this stage you and your agent negotiate with the seller of the home and make a final offer. In some cases, you can get all closing costs removed by negotiating with the seller. Once the purchase agreement is sold, the lender will order a USDA loan appraisal. This is to ensure that the home is in good condition for the home buyer and meets USDA standards. Closing costs can also be packaged into the USDA loan if the appraised value of the home is greater than the purchase price. The appraised value of a home is determined by a professional appraiser using criteria such as market conditions, price of similar homes, and quality of construction, etc. For example, if the home selling price is $150,000 and the appraised value is $155,000, then you can claim $5,000 for closing costs.
  5. Underwriting & Processing - the underwriter will review all the contracts and information to ensure everything is accurate. This process is longer than the conventional process as the underwriting is done by both the lender and the USDA. The lender underwrites the loan file, following which all the information is checked by the USDA. This process is streamlined if you have a credit score greater than 640, if your credit score is less than 640, then the USDA will undertake the manual process where more information may be required.
  6. Closing and Home Ownership - This is the last stage, once all the documents are approved, you take ownership of the home on the closing date.

The following USDA Eligibility calculator will help determine if you are eligible for a USDA Loan based on the eligibility criteria set out by the United States Department of Agriculture. Information such as status, location, income, debt, and credit score will be required.

USDA Loan Eligibility Calculator

Where will your home be located? Please select state and county.

What is your yearly household income and total monthly debt payment?

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What is your credit score?

Please answer the following questions:

Am I eligible?

You are Eligible for the USDA Loan

...through a Streamline Process

Top USDA Lenders in All 50 States 2021

Rank
1
Fairway Independent Mortgage Corp
2
Movement Mortgage
3
Caliber Home Loans
4
Guild Mortgage Company
5
Mid America Mortgage
6
PrimeLending
7
DHI Mortgage
8
Flat Branch Mortgage
9
Cross Country Mortgage
10
Union Home Mortgage
11
LoanDepot
12
GMFS
13
Home Point Financial
14
Amerifirst Financial Corp
15
Ruoff Mortgage
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Disclaimer: Lenders represent the top USDA Guaranteed Rural Housing Lenders. Data from the US Department of Agriculture (USDA).

USDA Loan Refinancing

Refinancing can help lower your mortgage rate which in turn can help reduce your monthly mortgage payment. USDA loans have three different refinancing options:

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  1. USDA Streamline Refinance - This streamline process is similar to other streamline refinances such as the VA loan which has the VA Interest Rate Reduction Refinance Loan (IRRRL). The homeowner must be current on their last 12 mortgage payments, which will allow for refinancing without an appraisal of the home. There are certain other requirements such as the loan must be a USDA loan, the refinance request must be at least 12 months after the start of the loan, must meet the income and DTI requirements of the USDA, and the refinanced loan cannot be larger than the original loan amount.
  2. USDA Streamline-Assist Refinance - This program has fewer requirements as it does not require credit checks, DTI ratio checks, and appraisals. The streamline-assist refinance has all the requirements of the streamline refinance with some additional requirements such as, the refinance must lower the monthly mortgage payment by at least $50, and low-income and very low-income earners who have a direct USDA loan require a new appraisal if they choose to refinance.
  3. Non-Streamline Refinance - The non-streamline refinance is identical to the streamline refinance program, but the borrowers need to get an appraisal of the home. This might be the right choice for you if you want to avoid the $50 requirement of the streamline-assist program or you are looking to get an appraisal of the home.

Direct USDA Loans vs. Guaranteed USDA Loans

The two main types of single-family housing USDA loans are Direct USDA loans and Guaranteed USDA loans. Direct USDA loans are for low and very-low income borrowers, while Guaranteed USDA loans are for low-to-moderate income borrowers. Besides maximum income limits, other differences between these types of USDA loans involve your mortgage rate, fees, and maximum loan amounts.

Direct vs. Guaranteed USDA Loans

Direct USDA LoansGuaranteed USDA Loans
LendersApply directly with the USDAApply with an approved lender (Bank or credit union)
Household Income Limit$26,800 to $96,000$91,900 to $138,000
Guarantee FeesNo Upfront or Annual USDA Guarantee Fee1% Upfront Guarantee Fee + 0.35% Annual Guarantee Fee
Payment Assistance Available?YesNo
Maximum Loan Amount$285,000 to $657,900No Maximum Loan Amount
Loan Term33 Years, up to 38 Years30 Years
Mortgage Interest RateFixed, set by USDAFixed, set by Lender

Direct vs. Guaranteed Lenders

With a direct USDA loan, you’ll apply at any USDA Service Center. With a Guaranteed USDA loan, you can apply with USDA-approved lenders, which include banks and credit unions. This is because the USDA loans you money directly with a direct loan, while guaranteed loans are issued by private USDA-approved lenders and are insured by the USDA.

This makes a difference in terms of who you will make your USDA loan application with and the processing of your loan. You can get assistance when applying for a direct USDA loan by working with an authorized intermediary that can help you with your loan application package. Common USDA loan intermediaries include the Federation of Appalachian Housing Enterprises (FAHE), the LIFT Community Action Agency, and the Rural Community Assistance Corporation (RCAC).

USDA Loan Application Intermediaries

IntermediaryStates Served
Federation of Appalachian Housing Enterprises, Inc. (FAHE)Alabama, Delaware, Florida, Georgia, Indiana, Kentucky, Maryland, Michigan, Mississippi, New York, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Vermont, Virginia, and West Virginia
Rural Community Assistance Corporation (RCAC)Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Western Pacific, and Wyoming
LIFT Community Action Agency, Inc.Arkansas, Kansas, Louisiana, Missouri, Nebraska, North Dakota, Oklahoma, South Dakota, and Texas
The Housing Fund, Inc.Minnesota, North Dakota, Tennessee, and Wisconsin
North East Community Action Corporation (NECAC)Missouri, Illinois, Iowa
NeighborWorks Southern New HampshireVermont & New Hampshire
Northwest Regional Housing Development CorporationArkansas & Puerto Rico
Southwest Minnesota Housing PartnershipMinnesota and Wisconsin
Tierra del Sol Housing CorpNew Mexico and Texas
HomeOwnership Center, Inc.West Virginia
NeighborWorks MontanaMontana
NeighborWorks Northeast NebraskaNebraska
Rural Ulster Preservation Company, Inc. (RUPCO)New York
The Housing Assistance CorporationNorth Carolina
Wilson Community Improvement Association (WCIA)) NetworkNorth Carolina
Virginia Housing Development Authority (VHDA)Virginia

Household Income Limit

Guaranteed USDA Loans have household income limits of up to 115% of the national or state median household income. Direct USDA Loans have lower household limits that range between 50% to 80% of the national or state median household income. The income limit that applies to you would depend on your county, the number of people in your household, and the program that you are applying for. A full list of income limits can be found on the USDA Direct Loan Limit Map.

For example, a 4-person household in Jacksonville, Florida will need to have a household income of $58,950 or less to qualify for a Direct USDA loan, or $91,900 or less to qualify for a Guaranteed USDA loan.

Guarantee Fees

Guaranteed USDA Loans require you to pay both upfront and annual USDA guarantee fees. This acts as mortgage insurance for your USDA loan. That’s because the USDA charges lenders a guarantee fee based on the mortgage amount that allows the USDA home loan program to operate without public funding. On the other hand, Direct USDA loans do not require mortgage insurance premiums to be paid, and no USDA guarantee fee is charged for direct loans.

Payment Assistance

While no payment assistance is available for guaranteed loans, there is payment assistance available for direct loans in the form of payment subsidies. The USDA subsidizes your monthly USDA mortgage payment for any amount due that is over your affordable payment limit. This limit is 24% of your household's adjusted income. It is also wise to look over first time home buyer programs to find additional assistance.

For example, let's say that a household has a USDA direct loan with a monthly principal and interest payment of $1,000. There's also $200 in taxes and insurance that is due every month. The household's adjusted annual income is $40,000.

Based on the 24% of the income limit, the family can afford to make $800 in monthly housing payments, which is 24% of $40,000, divided by 12 months. However, since $1,200 is required to be paid every month, this household qualifies for USDA payment assistance.

The total monthly subsidy that this household can receive is the difference between their payment limit and the actual payment required. In this case, that’s $1,200 minus $800, which is $400. This household can receive $400 monthly in payment assistance towards their USDA direct loan.

Very-low income borrowers will need to pay at least 22% of their annual income towards their USDA loan. On the other hand, low-income borrowers with between 50% to 65% of the adjusted median income will need to pay at least 24% of their annual income towards their USDA loan, while low-income borrowers with between 65% to 80% of the adjusted median income will need to pay at least 26% of their annual income towards their USDA loan.

USDA Payment Assistance Eligibility

% of Adjusted Median IncomeMinimum USDA Payment (% of Annual Income)
Very-low income borrowers-22%
Low-income borrowers50% to 65%24%
65% to 80%26%

USDA Subsidy Recapture

The USDA requires borrowers to repay the subsidies received if they sell the home or no longer occupy the home. However, not all of the payment assistance received will need to be repaid, depending upon the circumstances. For example, if you repay the subsidies received when you pay off your USDA direct loan, you will only need to repay 75% of the subsidies received.

There is a limit on how much repayment that you are required to make, which is the total amount of subsidies received or 50% of the home's value appreciation, whichever is less. USDA calculates the home's appreciation based on today's market value, less the loan balance, prior liens on the home, closing costs, and original equity.

If your USDA loan is in default, your house gets into a pre-foreclosure stage where your loan can be liquidated with a deed in lieu of foreclosure. However, the USDA will only accept a deed in lieu of foreclosure if the USDA will be able to sell the home for more than they would receive in a foreclosure. You will still need to repay your payment assistance subsidies even if you default on your USDA loan.

USDA Subsidy Recapture Payment Example

Let’s say that you purchased a home for $100,000. Due to your household’s low income, you receive $300 in monthly payment assistance for 10 years. After 10 years, you decide to sell the home for $200,000. How much will you need to repay?

50% of the home’s appreciation of $100,000 would be $50,000. The total amount of payment assistance, assuming $300 was received every month for 10 years, would be $36,000. This means that the homeowner will need to pay the USDA $36,000. If the homeowner had paid off the USDA loan early, they can get a 25% discount off of the subsidy recapture payment. This can reduce their repayment to $27,000 or less, depending on how early they repaid their loan and stopped receiving payment assistance.

To find out how much subsidy recapture you will need to repay, you can contact USDA's customer service center to receive an estimated amount.

Maximum Loan Amount

Guaranteed USDA loans have no fixed maximum loan amount, besides requiring the loan to be affordable based on your household income. Direct USDA loans have fixed loan limits that vary based on your county. For example, Orleans Parish, Louisiana has a loan limit of $285,000, while Los Angeles County, California has a loan limit of $657,900.

Besides strict loan limits, the loan can only be used to purchase homes that are less than 2,000 square feet and can be considered to be "modest". The USDA describes a "modest home" as one that is between 400 square feet and 2,000 square feet and does not have an in-ground swimming pool. This means that you will not be able to get a USDA direct loan if you want to finance a property with a swimming pool.

Loan Term

USDA Direct loans have a term length of 33 years, which can be extended to 38 years. Direct loans can only have a 38-year term if the borrower's household income is less than 60% of the median household income. You can choose to have a loan term that is shorter than the maximum loan terms. However, shorter terms will cause you to have a higher monthly mortgage payment. For that reason, you will not be eligible to receive payment assistance if you choose to have a loan term under 25 years.

The standard term length for manufactured homes is 30 years. Unsecured loans have a repayment term of 10 years. USDA Guaranteed loans have a term length of 30 years.

Mortgage Interest Rate

Both direct and guaranteed USDA loans have fixed interest rates. The main difference is that direct loans have a fixed rate that is set by the USDA, while guaranteed loans have a fixed rate that is set by the lender. As of September 1, 2022, the current USDA direct loan rate is 3.50%. USDA mortgage rates are updated once every month.

There’s a limit to how much a private USDA lender can charge borrowers. This limit is Fannie Mae's 90-day rate + 1%, rounded to the nearest 0.25%.

For example, Fannie Mae's 90-day rate for a 30-year fixed-rate mortgage was 2.6% as of December 20, 2021. This means that the maximum USDA rate from a bank or credit union would be 3.5% (2.6% + 1%, rounded to the nearest 0.25%).

Subsidized USDA Rates

Borrowers that qualify for payment assistance in the form of interest credits can have their interest rate modified to be as low as 1% based on the payment subsidies received.

USDA Loan Payment Options

If you have a direct loan, the USDA allows many payment options for borrowers.

  • Bank Transfer - Online or By Phone
  • Checks or Money Orders
  • Pre-Authorized Debits (PADs)
  • Western Union (Cash)
  • MoneyGram (Cash)

USDA Homeowner Education Requirement

All first-time homebuyers are required to complete a homeowner education course when applying for a USDA loan. This can range from in-person classes to online home-study. Homeowner education courses cost between $60 to $75. If the borrower is unable to afford the cost of a homeowner education course, then the course fee can be added to the USDA loan amount.

Which is more popular: Guaranteed Loans or Direct Loans?

USDA Section 502 Guaranteed Loans have historically been more popular than USDA Section 502 Direct Loans. In 2020, the USDA's annual budget for Direct Loans was $1 billion, while the budget for Guaranteed Loans was $24 billion. The same can be seen in loan obligations and funding. In 2010, $13.6 billion of guaranteed loans were funded by the USDA, while only $2.4 billion direct loans were funded. This has to do with the higher income limits of guaranteed loans, their more flexible property requirements, and their “unlimited” loan limits.

Conventional Loan vs. USDA Loan

There are several benefits of the USDA approved loan as compared to conventional loans. The USDA loans can be the best loan option if the home is being purchased in a rural area, as there are no minimum down payment and credit requirements! As USDA loans are backed by the government, they offer lower mortgage insurance premiums and competitive mortgage rates as compared to conventional loans. USDA Loans do have an upfront fee of 1% of the loan amount and annual variable mortgage insurance of 0.35% of the unpaid principal that remains for the life of the loan. The fees apply to both purchasing a home and refinancing a mortgage. Mortgage fees increase the cost of the mortgage and affect the mortgage’s annual percentage rate. To calculate your APR, you can use a mortgage APR calculator.

CriteriaConventional LoanUSDA Loan
LocationAnywhereRural Areas
Minimum Down Payment3% - 20%No Minimum Requirement
Minimum Credit Score620No Minimum Requirement
Mortgage Insurance Premium0.4 - 2.25% annually1% upfront + 0.35% annually

There are several benefits of the USDA approved loan as compared to conventional loans. The USDA loans can be the best loan option if the home is being purchased in a rural area, as there are no minimum down payment and credit requirements! As USDA loans are backed by the government, they offer lower mortgage insurance premiums and competitive mortgage rates as compared to conventional loans. USDA Loans do have an upfront fee of 1% of the loan amount and annual variable mortgage insurance of 0.35% of the unpaid principal that remains for the life of the loan. The fees apply to both purchasing a home and refinancing a mortgage.

FHA Loans vs. USDA Loans

FHA Loans and USDA loans are provided by approved lenders that are backed by government agencies, the Federal Housing Administration for FHA loans, and the United States Department of Agriculture for USDA loans.

CriteriaFHA LoanUSDA Loan
Minimum Credit Score5005No Minimum Requirement
Minimum Down Payment3.5% if credit score is greater than 580
10% if credit score is between 500 and 580
No Minimum Requirement
Loan Terms55 and 30 years530-year fixed
Income RequirementA steady source of IncomeHousehold Income < 115% of Median Household Income
Debt-to-Income (DTI) RatioDTI < 43%DTI < 41%
Mortgage InsuranceUpfront FHA MIP + Annual Variable MIPUpfront Funding Fee + Annual Variable MI
Mortgage Insurance Premium
Upfront: 1.75% of loan
Annual: 0.45% - 1.05%
Upfront: 1% of loan
Annual: 0.35%
Down Payment Gifts100% of down payment can be a giftGift money can be used for closing costs
Down Payment Assistance ProgramsYesNo
  1. Minimum Credit Requirements - FHA Loan has a minimum credit requirement of 500 if there is a down payment of at least 10% and USDA loans do not have a credit requirement.
  2. Minimum Down Payment Requirements - FHA loans can have a down payment as low as 3.5% of the home price if the credit score is greater than 580 and the minimum down payment increases to 10% if the credit score is at least 500. USDA Loans do not have minimum down payment requirements.
  3. Loan Terms - FHA loans are offered with 15 and 30-year loan terms, the mortgage can be fixed or an adjustable-rate mortgage which uses an index as a benchmark such as the Prime Rate which is linked to the FED Funds Rate. USDA Loan only has the 30-year option, and the mortgage can only be a fixed-rate.
  4. Income Requirements - FHA loans require a steady income for at least 2 years, whereas for USDA loans the annual household income cannot exceed 115% of the median income.
  5. Debt-to-Income (DTI) Ratio - FHA loan requires a debt to income ratio to be less than 43%, whereas, USDA loan is stricter and requires it to be less than 41%.
  6. Mortgage Insurance - All FHA loans require mortgage insurance in the form of FHA Mortgage Insurance Premium (MIP). The FHA MIP is divided into an upfront fee and annual variable MIP. The USDA loan also has an upfront fee and annual variable mortgage insurance (MI).
  7. Mortgage Insurance Premium - The FHA upfront fee is 1.75% of the loan amount, the variable fee is in the range of 0.45% - 1.05%. The variable FHA MIP is dependent on the loan amount, down payment, and term of the loan. The USDA mortgage insurance premium is called the USDA guarantee fee. The upfront fee is 1% of the loan and the variable mortgage insurance is 0.35% of the remaining principal balance.
  8. Down Payment Gifts - Down payment for FHA loans can be funded 100% by gift money, as long as the gift money can be proven that it is a gift and does not have to be repaid. USDA loans do not have a minimum down payment requirement, hence gift money does not apply. However, gift money can be used for closing costs.
  9. Down Payment Assistance Programs - FHA loans have down payment assistance programs that vary by location. USDA loans do not have minimum down payment requirements, hence, they do not have down payment assistance programs.
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