What is a USDA loan?
Is country life calling your name? A USDA loan requires no down payment and is designed to help rural and suburban buyers achieve homeownership. Let’s check out the benefits of this government-backed option.
How do USDA loans work?
USDA loans, supported by the U.S. Department of Agriculture, were created to help rural residents buy property without a down payment, a major barrier for many aspiring owners.
Pro Tip
Heading to the countryside? Discover how far your salary stretches in your new rural retreat with our Cost of Living Calculator.
With low interest and insurance costs, these loans make ownership more accessible to people outside big metro areas. USDA loans are aimed at low- to moderate-income families who might not qualify for conventional mortgages. When considering a USDA home loan, it's essential to understand the three main types available:
USDA Guaranteed Loan: This is the most common type of USDA home loan. It offers the fantastic benefits of low interest rates and no down payment requirement, making it easier for you to own your dream home.
USDA Direct Loan: These loans come directly from the government and are designed to assist qualifying low-income buyers. With interest rates as low as 1%, this option makes homeownership more accessible and affordable.
USDA Home Improvement Loans: If you're looking to spruce up your place, these loans are available to eligible rural homeowners who need to make repairs or improvements. It's a great way to enhance your home's comfort and value.
USDA loan requirements
To qualify for a USDA mortgage loan, your property must be in an area designated by the USDA and used as your primary residence. To see if a property is eligible, head to Eligibility (usda.gov). Let’s take a look at what other USDA home loan requirements you’ll have to meet.
USDA loan limits
Fortunately, there are no fixed loan limits on a USDA home loan. Instead, the amount you can borrow is determined by your ability to repay the loan, ensuring that it's manageable based on your financial situation. Nice and simple. This makes loans accessible to those who really need them.
USDA loan interest rates
Here’s more good news on USDA home loans: interest rates are typically lower than conventional loans, which can save you thousands of dollars over the life of the loan. Affordability is a cornerstone of the program, making it a great option if you’re looking to invest in ownership sooner rather than later.
USDA loan down payments
Perhaps the biggest benefit of a USDA loan is that it requires absolutely no money down. What a relief! This opens the door to ownership for many people who couldn’t otherwise afford a large upfront payment. By removing a major financial roadblock, USDA loans make homeownership a reality for all.
USDA loan mortgage insurance
Instead of ongoing PMI, USDA mortgage loans include a one-time, upfront guarantee fee, plus an annual fee. This helps protect lenders if there's ever a problem with payments and ensures that the program remains viable for future generations. It can also make your monthly payments predictable, which makes overall budgeting that much easier.
Pro Tip
When opting for a USDA loan, remember that your future home must be appraised by a USDA-approved appraiser. This appraisal is important as it determines the fair market value of the property to ensure you're paying a reasonable price, and it also checks that the home meets all USDA standards for livability.
USDA loan credit score
One of the central USDA home loan requirements needed is, of course, a decent credit score. While there isn’t a strict minimum set by the USDA itself, lenders like to see a credit score of 640 or higher. If you’re not there yet, don’t be discouraged. You may still qualify by showing proof of a stable income, a low debt-to-income ratio or a history of paying bills on time. Think rent payments, car notes and even cell phone bills.
USDA loan DTI
Debt-to-income ratio (DTI) is a handy formula that helps lenders determine your ability to repay debts. It’s calculated by dividing your total monthly debt payments by your gross monthly income. For USDA loans, your DTI generally shouldn’t exceed 41%, but there are exceptions to this rule. For instance, a higher credit score or extra income may count as exceptions, so be sure to share your full financial picture with your lender.
USDA loan income requirements
To qualify for a USDA loan, your household income can’t exceed 115% of the median income of the area. This ensures that the program reaches those it’s truly designed to help. This cap helps keep the focus where it should be: on individuals and families who need support finding homes in rural areas.
How is a USDA loan different from other loans?
Here’s a simple breakdown of how USDA loans differ from other government-backed loans.
USDA loan vs. FHA loan
| feature | USDA Loan | FHA Loan |
|---|---|---|
| Down Payment | No down payment required | Minimum 3.5% down payment required |
| Interest Rates | Typically lower | Generally higher compared to USDA loans |
| Area Eligibility | Restricted to eligible rural areas | Available to a broader audience, including urban areas |
VA loan vs. USDA loan
| Feature | VA Loan | USDA Loan |
|---|---|---|
| Down Payment | No down payment requried | No down payment required |
| Target Audience | Veterans, active-duty and eligible family members | Qualifying rural home buyers |
| Insurance/Fees | Generally doesn’t require mortgage insurance | Requires upfront and annual fees instead of PMI |
Looking for an alternative to a USDA loan?
The Citi HomeRun™ Mortgage could be a great alternative to a USDA loan, especially if you're not tied to living in a rural area. While there are some geographical criteria and income limitations to consider, the perks are great:
Low down payment
Put down as little as 3% with no private mortgage insurance (PMI) required, perfect for those who prefer to avoid a hefty down payment.
Competitive interest rates
Secure a favorable rate for your loan.
Flexible credit guidelines
Enjoy more lenient credit requirements.
Citi also offers a suite of additional products and assistance programs to support you throughout your home buying journey.
Ready to learn more?