USDA home loans open up the dream of owning a home to people in low-population areas who otherwise could not afford it. If you live in a place with a population of less than 35,000 and you can't qualify for a conventional loan, you may qualify for a USDA guaranteed loan or a USDA direct loan. One of these mortgage programs could be your ticket to getting out of an overcrowded, unhealthy, or unsafe housing situation and into a place of your own that has running water, electricity, heat, sanitary waste disposal, and enough space.

Key Takeaways

  • The United States Department of Agriculture (USDA) provides mortgages of last resort to the people in rural areas who need them most.
  • Qualification standards for these home loans are lenient compared to other mortgages, but you will need a steady income that's high enough to repay the loan over 30+ years at a fixed interest rate.
  • The definition of "rural" is broader than you might think, since it includes areas with populations as high as 35,000.

What Is a USDA Home Loan?

A USDA home loan is a mortgage either made or guaranteed by the United States Department of Agriculture's Rural Housing Service agency to help households with very low to moderate incomes purchase safe and affordable homes in rural areas. The Section 502 loan program has operated since 1949. Today, it provides low-cost financing to buy a home through two programs: the Section 502 Guaranteed Loan and the Section 502 Direct Loan. Both programs provide 100% financing to eligible borrowers.

The Two Types of USDA Home Purchase Loans

The USDA Guaranteed and Direct loan programs are very different, although both provide housing in rural areas and offer no-down-payment financing. Here's what you need to know about how each program works and how to qualify.

Guaranteed USDA loan

By guaranteeing 90% of the loan amount, the USDA makes it feasible for mortgage lenders to offer these 30-year, fixed-rate loans with no down payment. You can use a guaranteed USDA loan to buy, construct, repair, renovate, or relocate a primary residence. Individual lenders determine the interest rates they're willing to offer borrowers on these loans, so it's important to shop around. Here's how to qualify.

Down payment: 0%.

Assets: None.

Debt-to-Income Ratio: 41%. If you show a history of spending more than 41% of your income on debt payments while still meeting all your financial obligations, you may still qualify.

Credit score: No minimum, as long as you can demonstrate an ability and willingness to repay the loan. It may be easier to qualify with a score of at least 640. However, you may still qualify if your score is lower or if you have no score. You will have a stronger case if you don't have delinquent payments on your credit report or if you can provide a history of on-time rental payments or other positive source of nontraditional credit.

Income: Low to moderate income, not to exceed 115% of the area's median income. Must not qualify for conventional financing without private mortgage insurance (PMI). One-year history of traditional employment or two-year history of self-employment or seasonal income.

Property location: Must have a population of 35,000 or less. This means many suburban areas qualify, not just rural ones.

Property type: Primary residence, non-income-producing. The property cannot have an in-ground swimming pool.

Home size: Must be considered modest for the area.

Property size: Must be typical for the area.

Direct USDA loan

Direct USDA loans come straight from the USDA and are for very-low and low-income borrowers who can't get an affordable mortgage from other sources and who don't have decent, safe, and sanitary housing. The typical loan term is 33 years, but loan terms can be as long as 38 years.

The interest rate in early 2021 is 2.5%, but your effective rate can be as low as 1% after subsidies. You can use this loan to buy, construct, repair, renovate, or relocate a primary residence. Here's how to qualify for a direct USDA loan.

Down payment: 0%.

Debt-to-Income Ratio: 41%, unless there are compensating factors such as a history of comfortably spending a higher percentage of income on housing.

Credit score: Ideally, at least 640. However, you may still qualify if your score is lower or if you have no score. You will have a stronger case if you don't have a lot of delinquent payments on your credit report or if you can provide nontraditional credit, such as a history of rental payments.

Income limit: Low and very low income. Limit varies by county and household size.

Property location: The location must have a population of 35,000 or less. This means many suburban areas qualify, not just rural ones.

Property type: Primary residence, non-income-producing. The property cannot have an in-ground swimming pool.

Home size: 2,000 square feet or less.

Property size: Small enough that it can't be subdivided into smaller parcels under local zoning laws.

How the USDA Loan Guarantee Works

USDA guaranteed loans (but not USDA direct loans) require borrowers to pay a loan guarantee fee of 1% of the amount borrowed. This fee can be paid by the lender. Borrowers must also pay an annual fee of 0.35% of the loan amount.

How to Get a USDA Home Loan

For a guaranteed loan, check out the USDA's list of approved lenders. These lenders offer USDA loans, but the USDA does not recommend specific lenders. You should shop around to make sure you're getting the best terms. For a direct loan, apply directly to USDA Rural Development. The financing for these loans comes from the government.

For either program, you must be a U.S. citizen or legal nonresident alien. You cannot be delinquent on any federal debt.

The Bottom Line

USDA guaranteed and direct home loans help very low, low, and moderate-income borrowers in less-populated areas get affordable mortgages to purchase modest homes with no down payment. If you thought you'd never be able to afford a home or qualify for a mortgage and if you are living in overcrowded or unsafe housing, get in touch with USDA Rural Development and see if one of their housing programs might be able to help you.