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What Is a USDA Loan and How Does It Work?

A great option for those looking to buy a home in a qualifying area

USDA home loans can be a practical option for first-time homebuyers or those who have a lower to moderate income and may not qualify for a conventional loan. Explore how USDA loans work and see if one is right for you.

What Is a USDA Loan?

A USDA loan is a home loan backed by the United States Department of Agriculture (USDA). This type of loan aims to help lower-income individuals become homeowners in a qualifying rural or suburban area. With no down payment typically needed, USDA loans help promote homeownership in less populated areas.

How Do USDA Loans Work?

USDA loans are specifically for those looking to purchase a primary residence in a qualifying rural or suburban area.

USDA Loan Eligibility

Individuals eligible for a USDA loan must be looking to purchase property in a USDA-approved area. You can check to see whether a home is eligible by using the USDA's loan map. In addition, you must meet citizenship, income, credit, and other requirements to get approval. At Freedom Mortgage, the requirements are as follows:

Citizenship: You must be a U.S. citizen or permanent resident of the U.S.
Credit score: Your credit score typically must be 620+.
Closing costs: USDA loan closing costs can include lender fees, discount points, homeowners insurance, property taxes, and title fees, as well as the upfront guarantee fee.
Income limits: To qualify for the USDA loan program, you must fall under specific income limits for your area. To learn more about income eligibility requirements for a USDA loan in your location, visit the USDA income eligibility page
Guarantee fees: USDA guarantee fees are a type of mortgage insurance unique to this type of loan. The fees must be paid upfront at closing and are usually around 1% of the loan amount. Note that there is also an annual guarantee fee equal to 0.35% of the unpaid principal balance.
Location: The home you're looking to repair or purchase must be located within an eligible rural or suburban area.
Property restrictions: USDA loans can only be used for the purchase an owner-occupied primary residence. To qualify, homes must also meet USDA requirements surrounding condition, location, and safety.

USDA Loan Benefits and Considerations

When thinking about whether a USDA loan is right for you, consider the following key benefits:

Often no down payment
Competitive interest rates
No private mortgage insurance
Low guarantee fees

Keep in mind that USDA loans come with income eligibility requirements, location restrictions, and often a longer underwriting process. There's also a no cash out refinance option available for USDA home loans.

USDA loans are great options for those who are looking to live in a rural area and have a lower income.

How To Apply for a USDA Loan

Here's what the process typically looks like to apply for a USDA loan:

Submit a loan application for the amount of funding needed for your primary home purchase or repair loan.
The lender reviews the application, and if you qualify, the loan is approved.

USDA Loans vs. Other Mortgage Types

If you're weighing the benefits of a USDA loan against other types of loans, here are some important differences to consider:

Loan Type	Eligibility	Minimum Credit Score	Minimum Down Payment	Upfront Insurance/Fees	Monthly Insurance/Fees
USDA Loans	Rural and some suburban homebuyers	Often 620	Often 0%	Yes	Yes
Conventional Loans	All homebuyers	Often 620	Often 5%	No	Usually none once 20% equity is reached
FHA Loans	All homebuyers	Often 550	As low as 3.5%	Yes	Yes
VA Loans	Veterans, military personnel, surviving spouses only	Often 550	Often 0%	Yes	No

Keep in mind that the minimum credit scores in the chart above are based on the minimum scores required by Freedom Mortgage. Many lenders set a higher minimum for the different loan programs.

Other Types of USDA Loans

There are three types of USDA loans you should know about during your homebuying journey:

Guaranteed loans: These types of loans are offered by private lenders and are backed by the USDA, which allows for a 0% down payment, among other benefits, such as lower interest rates and more flexible credit requirements.
Direct loans: These types of loans are offered directly by the USDA to lower-income applicants. They often include subsidized interest rates. In some cases, they allow for an extended loan term.
Single-family housing repair loans and grants: Part of the Section 504 Home Repair program, these help homeowners repair their existing homes. Loans are capped at $40,000, while grants are at $10,000 (for those 62 and older) You may combine them for up to $50,000 total. If the repairs are related to a presidentially declared disaster, the grant cap increases to $15,000, for a total of $50,000. Loans usually have a 20-year term with a low interest rate. Freedom Mortgage does not offer repair loans and grants at this time.

USDA Loan FAQs

Have more questions about a USDA loan? We're here to help.

Is a USDA Loan a Good Idea?

Whether a USDA loan is a good idea for you will depend on your situation. USDA loans are great options for those who have low to moderate income, little cash saved for a home down payment, and the need for a lower interest rate.

Is It Hard To Get Approved for a USDA Loan?

Whether it's hard to get approved for a USDA loan depends on whether you meet the lender's specific requirements for the loan type.

What Credit Score Do You Need for a USDA Loan?

Although the minimum credit score requirement can vary from lender to lender, generally speaking, lenders look for a 640 score or higher to approve an applicant for a USDA loan. Some lenders may accept lower (580-620) for manual underwriting. At Freedom Mortgage, we consider applicants with credit scores as low as 620.

Do USDA Loans Require Private Mortgage Insurance (PMI)?

No, USDA loans don't require private mortgage insurance (PMI). However, USDA loans do require paying guarantee fees (once upfront and then annually). These fees act as a specific type of insurance for USDA loans, with an upfront fee of about 1% of the loan amount and an annual guarantee fee of 0.35% of the remaining balance.

How To Apply for a USDA Loan: Get Started Today

USDA loans are designed to help first-time homebuyers and lower-income customers on the road to homeownership. Get prequalified today, and we'll help you figure out if a USDA loan is right for you.