USDA loans: Affordable rural mortgages

Disclaimer: Citi may have different eligibility criteria and/or product offerings than those mentioned on mortgage.com.

Looking to settle down in the countryside with a no down payment mortgage? You’re in luck, because 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.

Before we get into the nitty-gritty, here are the major perks of landing a USDA home loan:

• No down payment required so you can finance 100% of the purchase price 
• Lower interest rates especially compared to conventional loans 
• Flexible credit guidelines for people who have less-than-stellar credit 
• Lower mortgage insurance costs compared to FHA loans

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.

With low interest and mortgage insurance costs, these rural home 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.

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. This opens the door to ownership for many people who couldn’t otherwise afford a large upfront payment or would need substantial down payment assistance. By removing a major financial roadblock, USDA loans can make homeownership a reality. 

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.

USDA loan credit score

One of the central USDA home loan requirements needed is, of course, a qualifying 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 (DTI) 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. So, be sure your income qualifies in the region you hope to settle down in.

If a USDA loan sounds like a good match and you want to apply, take a look at the USDA loan process step by step:

1.     Confirm your eligibility

Check that your credit score, DTI ratio and income fit the criteria and ensure that you’re house hunting in a USDA-eligible area by visiting Eligibility (usda.gov).

2.     Select your loan type

Decide whether you’ll pursue a guaranteed loan from a private lender or a direct loan from the USDA Rural Development office. Keep in mind that direct loans are typically reserved for low-income borrowers.

3.     Get prequalified or preapproved

Get prequalified or preapproved before you find “the one” to get an idea of how much you can borrow. A preapproval is the best route because it’s a more thorough assessment of your borrowing potential that can make your offer stand out to sellers.

4.     Gather required documents

Track down all those official documents like your Social Security Number, pay stubs, W-2 forms, tax returns and bank statements.

5.     Complete application

Carefully fill out the application and provide all required documents so your lender can quickly review your file, check your credit and conduct a property appraisal.

6.     Loan review and approval

Over the next few weeks, your lender or the USDA will underwrite your loan. They may reach out to gather extra paperwork or ask a few clarifying questions before delivering a decision.

7.     Close on the home

If you get approved, you’ll sign final paperwork, pay any closing costs and officially become a homeowner.

If you want to keep exploring your options, here’s a simple breakdown of how USDA loans differ from other government-backed loans.

USDA loan vs. FHA loan

VA loan vs. 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. Heads up, this loan program is only offered in select markets and income limitations may apply. But the perks speak for themselves: 

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 flexible credit guidelines compared to most conventional loans.

Citi also offers a suite of additional products and assistance programs to support you throughout your home buying journey.

Ready to learn more?