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What Is a USDA Loan?

Learn whether this rural home loan fits your needs.

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By Laura Agadoni

Written by

Laura Agadoni

Freelance writer

Laura Agadoni has spent more than 10 years covering finance and is an expert on real estate, mortgages, personal loans, and student loans. Her work has been featured by The Motley Fool, USA Today, and Yahoo Finance.

Edited by Reina Marszalek

Written by

Reina Marszalek

Senior editor

Reina Marszalek has over 10 years of experience in personal finance and is a senior mortgage editor at Credible.

Updated January 15, 2025

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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USDA loans date back to 1937 when the U.S. government created them to help people buy homes during the Great Depression. They were called farm loans back then, and although these loans have changed over the years, the reasoning behind them remains the same. They provide a vehicle for lower-income borrowers to buy a rural home.

What is a USDA loan? 

A United States Department of Agriculture (USDA) loan is a government-backed loan for rural homebuyers. It’s popular with lower-income and first-time homebuyers because there’s no down payment requirement. But you must buy a home in a government-designated rural area.

Types of USDA loans

USDA loans come in two types: 

Single Family Housing Guaranteed

Also called the Section 502 Guaranteed Loan Program, you can apply for a Single Family Housing Guaranteed USDA loan through an approved lender. Because this loan is backed by the government, there is little risk for lenders, which makes it possible to lend to borrowers who otherwise might not qualify.

Single Family Housing Direct

Also called the Section 502 Direct Loan Program, the Single Family Housing Direct USDA loan is available directly from the USDA. This loan is for low- and very-low-income rural homebuyers who can’t get a loan from any other source. Additional help comes in the form of mortgage payment assistance that borrowers can get for a short time. You must meet income and other eligibility requirements to qualify for this loan type.

Eligibility requirements for USDA loans

Eligibility requirements for USDA loans require you to be a U.S. citizen, a U.S. non-citizen national, or a Qualified Alien, and you must use the property as your primary residence. You can find property and income eligibility requirements at the USDA Income and Property Eligibility Site. Here’s how it works:

  • Property eligibility: To determine whether you qualify for either the Guaranteed or Direct USDA loan based on property location, you can enter the address of a property in the USDA Eligibility Map, click “Go,” and you’ll find out whether the property is eligible. You could also zoom in on locations by double-clicking the map. Once you zoom in close enough, a pushpin icon appears, which you can click on to determine whether the area is eligible.
  • Income eligibility: To determine whether you qualify for the Guaranteed or Direct USDA loan based on income, you can select your state and county. You then need to fill out a questionnaire, which first asks for the number of people in your household. After you complete the entire questionnaire, you find out whether you’re eligible for a USDA loan based on your household income.
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Note:

Single Family Housing Guaranteed loans and Single Family Housing Direct loans have no credit score requirement, but you must demonstrate an ability to repay your debt. Lenders that issue Guaranteed loans generally require a credit score of at least 620.

Benefits of USDA loans

Homebuyers using a USDA loan to buy property in a rural area can get lower interest rates and different terms than they would with a conventional mortgage. Here are some of the primary benefits of USDA loans: 

  • No down payment: USDA loans can be 100% financed, meaning you don’t need to have a lot of cash to buy a home.
  • Lower interest rates: With a 502 Direct Loan, the interest rate, effective December 1, 2024, is 4.50%. With a 502 Guaranteed Loan, your interest rate depends on the lender. Many lenders offer competitive rates because the government guarantees 90% of the loan, making these loans significantly less risky for lenders.
  • Low credit score requirements: While there are no credit score requirements with a 502 Direct Loan, 502 Guaranteed Loan requirements vary by lender and can be as low as 620, or in some cases, even lower.
  • Longer payback options: With a 502 Direct Loan, you get up to 33 years to pay it back. Very-low-income borrowers can have a repayment term of up to 38 years. 502 Guaranteed Loan terms vary by lender.
  • No private mortgage insurance (PMI) requirement: With a conventional loan, if you have a down payment of less than 20%, you need to pay PMI, which is typically 0.3% to 0.7% of the loan amount per year. You don’t need to pay this with a USDA loan, but you do need to pay a one-time upfront loan guarantee fee of 3.5% of the loan and an annual fee of no more than 0.5% of the average annual principal balance for the life of the loan.

How to apply for a USDA loan

You apply for a Single Family Housing Guaranteed Loan through an approved lender. You can search approved lenders by state on the USDA Active Lenders page. You should also compare several lenders to find the most favorable terms.

To apply for a Single Family Housing Direct Loan, you can engage the services of a loan application packager (which you can find by browsing your state), request an application package from the Rural Development Agency, pick up an application package at your local USDA Rural Development office, or apply online through eForms, which you can find on the USDA’s website.

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Tip:

When you shop for a lender, look for several that have experience originating USDA loans. As you go through the loan process, you’ll want to work with a lender who knows the ins and outs.

USDA loan vs. FHA loan: A comparison

USDA and FHA loans have similarities and differences that you should factor in when shopping for a home loan. Here’s what you need to know about the qualification requirements, down payment requirements, and other important details:

Similarities

  • Backed by the government: Both USDA and FHA loans are backed by the government, which makes them popular with lenders and homebuyers. Lenders enjoy less risk with these loans, and homebuyers enjoy more lenient eligibility requirements: These loans tend to have lower credit score and down payment requirements than conventional loans. 
  • Primary residence only: With both USDA and FHA loans, the home you buy must be used as your primary residence.

Differences

  • Eligibility requirements: USDA loans are typically more difficult to obtain since you need to meet income and property eligibility requirements. With FHA loans, there is no income limit, but the loan amount can’t exceed $524,225 in most areas.
  • Credit score: You can qualify for an FHA loan with a credit score as low as 500. Your score needs to typically be no lower than 620 for USDA’s Single Family Housing Guaranteed loan, but for USDA’s Single Family Housing Direct loan, there is no credit score requirement.
  • Down payment: The USDA loan has a no-down-payment option, while FHA loans typically require at least 3.5% down.

USDA loan FAQ

Can I use a USDA loan to purchase a fixer-upper property?

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Are USDA loans only for first-time homebuyers?

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What are the income limits for USDA loan eligibility?

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How does the USDA define “rural” areas for loan eligibility?

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Is mortgage insurance required for USDA loans?

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Meet the expert:
Laura Agadoni

Laura Agadoni has spent more than 10 years covering finance and is an expert on real estate, mortgages, personal loans, and student loans. Her work has been featured by The Motley Fool, USA Today, and Yahoo Finance.