USDA Loans: Is a Rural Home Loan Right for You?

In 2022, the U.S. Department of Agriculture (USDA) guaranteed 35,862 single-family home loans worth an estimated $6.6 billion dollars.^[1] Known as USDA loans, these mortgages help tens of thousands of Americans purchase homes each year.

For many prospective home buyers, these loans are particularly appealing because there’s no down payment requirement. But be warned, restrictions apply.

We’ll explain how USDA loans work, eligibility requirements and the pros and cons. We’ll also compare them to other popular mortgage options, so you can decide if you’re interested in pursuing this type of loan.

What Is a USDA Loan?

USDA loans are mortgages guaranteed by the USDA that require no down payment and offer ultra-competitive interest rates. Because the program was designed for low- to moderate-income borrowers in rural areas, income limits and location restrictions apply.

The USDA was actually signed into law by President Abraham Lincoln over 160 years ago. He referred to it as “The People’s Department.”^[2] Part of the USDA’s mission is the development of America’s rural areas, which includes affordable rural housing.

USDA loans function the same way as other mortgages. However, they’re a little more rigid in terms of their structure. These loans must be 30-year fixed-rate loans.

Guaranteed vs. direct loans

When referring to USDA loans, most people mean loans that are guaranteed by the USDA but are actually issued and processed by a separate mortgage lender. The USDA will guarantee 90% of the loan’s value, which lowers the risk for participating lenders.^[3]

However, in some cases, the USDA issues mortgages themselves through their direct loan program. This program comes with even stricter requirements. For example, income thresholds are lower, and applicants must be without decent, safe and sanitary housing to qualify. 

There were only 1,678 of these loans issued in 2022, a figure totaling less than 5% of the mortgages the USDA guaranteed in the same period.^[1] For the purposes of this article, when we say “USDA loan,” we’re talking about the guaranteed loan program.

USDA Loan Requirements

Who can qualify for a USDA loan? You’ll need to meet the provisions outlined below.

• Primary residence: The home you’re financing must serve as your primary residence. In other words, you have to live in it. You can’t buy the home and rent it out.
• Eligible rural area: The property must be located in an eligible rural area. You can enter an address into this USDA tool to see if the property would qualify.
• Income limits: Income limits for this loan are capped at 115% of the area’s median income.^[4]
• Credit score: You’ll need a credit score of 640 or higher for streamlined approval. You could still qualify with a lower score, but you’ll be subject to additional analysis.^[5]
• Debt-to-income (DTI) ratio: Your DTI ratio should not exceed 41%.^[4] However, debt ratio waivers can be granted.
• Unable to put 20% down on a conventional loan: Borrowers must be unable to obtain reasonable credit from another source. This 20% down payment is the threshold lenders use to determine that.^[6] 

If you don’t meet the DTI ratio or credit score requirements outlined above, it’s still worth taking the time to talk to your lender. Those numbers are initial judgments, meaning it’s still possible to qualify for a USDA loan without meeting those thresholds.

USDA Mortgage Pros and Cons

If you’re eligible to apply for a USDA loan, here are some pros and cons to consider before doing so.

USDA Loans vs. Other Popular Mortgages

USDA loans aren’t the only option available for low- to moderate-income borrowers. This chart compares the main requirements for USDA loans versus the other most popular mortgages: conventional loans and Federal Housing Administration (FHA) loans.

Requirement	Conventional Loan	FHA Loan	USDA Loan
Location	No location requirements	No location requirements	Must be in an eligible rural area
Loan Limits	$726,200 or $1,089,300 in high-cost areas[8]	$472,030 – $1,089,300 depending on area[9]	None
Credit Score	Minimum 620[10]	Minimum 500, but will affect the down payment if below 580[11]	640 preferred, but lower is possible
Down Payment	5% (unless you meet specific requirements)	3.5% with a credit score 580 or higher, 10% with a 500 – 579 score[11]	None
Income Limits	None	None	115% of median area income

For a more detailed breakdown of the difference between these loans, and advice on which to choose, check out the articles below.

• USDA versus conventional loans
• USDA versus FHA loans

How To Get a USDA Loan: Next Steps

For a variety of reasons, not all lenders offer USDA loans. So your first order of business will be finding a lender in your area that does. The USDA has curated a state-based list here.

It’s worth taking the time to contact multiple lenders. Ask them questions about their service offerings and their rates and fees. Remember, a USDA loan might not be your best option, so don’t immediately rule out lenders who don’t offer them. 

Final Thoughts on USDA Loans

There’s a lot to like about USDA loans on the surface, but there’s also a lot of fine print to weed through. FHA loans can be a great option that comes with fewer restrictions. Be sure to talk through your options with your mortgage lender, so you can feel confident you have all the information you need to make the best possible decision.