What is a USDA loan and am I eligible? (2024)

USDA loans allow eligible homebuyers to get zero-down-payment mortgages in rural areas.

Because they're backed by the U.S. Department of Agriculture, these loans have lower rates and more flexible credit requirements than conventional mortgages. They also don't require private mortgage insurance, which can add more than 2% to your loan annually.

A USDA loan is a zero-down payment mortgage option aimed at providing low- and moderate-income buyers in rural areas a path to homeownership.

USDA guaranteed loans are offered by approved private banks and mortgage lenders.The Department of Agriculture issues mortgages itself, as well, but USDA direct loans have preset interest rates and more stringent income requirements.

Because the government is assuming the financial risk, USDA loans are considerably more affordable than conventional mortgages: On June 26, 2024, interest rates on a conventional 30-year mortgage averaged 7.48%, while USDA guaranteed loans averaged 6.69%, according to the St. Louis Fed. For USDA direct loans, the rate set by the federal government is just 4.75%.

The USDA also provides loans and grants to fund home repairs and improvements, with a set interest rate of only 1%.

While USDA loans have attractive benefits, they also have stringent eligibility requirements

Income requirements

To qualify for a USDA guaranteed loan with a private lender, your household income can't exceed 115% of the average median income (AMI)in the county where you're looking to buy. The limit is 80% AMI for a USDA direct loan and 50% for repair loans and grants.

You can check the AMI in your area on the USDA website.

Property requirements

Credit requirements

While you need to demonstrate you can repay the loan, the USDA doesn't set credit score limits for direct loans. If you're applying for a USDA guaranteed loan from a private lender, however, they will typically want to see a credit score of 640 or better.

USDA-approved lenders also prefer a debt-to-income ratio of 41% or less and your monthly mortgage payment, including interest and taxes, shouldn't exceed 29% of their monthly income.

USDA guaranteed mortgages from private lenders don't have set loan limits. If you're working directly with the USDA, the maximum in most of the U.S. is $398,600, although some high-cost areas have much higher caps. You can check the USDA's area loan limit map to find the limit in your area.

The maximum for USDA repair loans is $40,000, although homeowners 62 and older are eligible for an additional home improvement grant of up $10,000

USDA guaranteed loans are 30-year fixed-rate mortgages, while the term for a direct loan is 33 years, though some may be extended to 38 years. USDA repair loans have a term of 20 years.

(USDA Direct loans don't come with fees but there are two main charges attached to USDA guaranteed loans.

• Upfront guarantee fee: A percentage set by the USDA, this fee functions similarly to mortgage insurance. For 2024, the upfront guarantee fee is equal to 1% of your total loan amount. If your USDA loan was for $150,000, for example, your total amount would be $151,500.
• Annual fee: This is typically rolled into your mortgage payment each month. For 2024, the annual fee has been set at 0.35% of the total loan. For a $150,000 loan, that would add about $44.19 to your monthly mortgage.

In comparison, the average monthly cost of private mortgage insurance in March 2024 was between 0.46% and 1.5% of the loan total, according to the Urban Institute.

In 2024, the USDA named Guild Mortgage one of its top lending partners.

In addition to the usual mortgage calculators and explainers, the PNC Bank website also includes a Home Insight Planner that can give new house hunters a clear picture of their financial standing and show them houses that meet their budget. There's also a tracker feature so you can manage your application and securely communicate with your loan officer.

If you qualify for a USDA direct loan, PNC has a $5,000 grant for low-income borrowers that can be put toward closing costs or other prepaid fees.

Read our PNC Bank mortgage review

Pennymac doesn't offer USDA purchase loans but it does have a streamlined USDA mortgage refinance program that can lower your monthly payment without requiring an appraisal or inspection.

According to PennyMac, the streamlined assist refinance can save you more than $50 a month in principal and interest, including the annual guarantee fee. On an eligible $165,000 mortgage, refinancers could save an extra $2,877 in upfront fees.

In 2024, the USDA named Pennymac one of its top lending partners.

While there's a lot to recommend about USDA loans, there are drawbacks, too.

Pros

• No down payment: USDA loans are backed by the government, so lenders are taking on less risk. This can help first-time homebuyers who haven't saved up a lot yet.
• Lower rates: Interest on USDA loans is substantially lower than conventional mortgages.
• Flexible credit requirements: While lenders still look for good credit and a low debt-to-income ratio, there is no set credit score or DTI for USDA loans.
• No mortgage insurance: For a conventional loan, PMI can top 2% and typically has to be paid until you reach 20% home equity.
• No prepayment penalty: To compensate for lost interest, banks often charge homeowners a fee if they pay off their mortgage early. USDA loans have no such penalty.

Cons

• Strict income eligibility: Loans are limited to low-to-moderate-income borrowers. For direct loans, that means an income of no more than 80% of the median in your region.
• Location restrictions: USDA loans are only approved for homes in designated rural areas meeting minimum property requirements.
• Fees: Loans don't come with mortgage insurance, but borrowers have to pay both an upfront charge and an annual fee.
• Longer to close: Because lenders have to verify your income and property eligibility, and the home must pass a USDA appraisal, the underwriting process usually takes more time.
• No cash-out refinance option: You can refinance a USDA mortgage but you can't get a home equity loan.

If you meet the income and property requirements, USDA loans are a great option. Not only do you enjoy a lower interest rate, but you can skip the down payment without paying mortgage insurance or showing substantial cash reserves.

The USDA loan plan was designed to help lower-income Americans achieve homeownership, so credit requirements are much more flexible than conventional loans.

First, see if you're eligible for a USDA loan by checking the income eligibility chart on the USDA website.

If you do qualify, you'll need to find a lender that offers USDA loans and then submit what you would with any other mortgage application — proof of income, bank statements and other paperwork.

If you're not approved, you can try applying for a USDA direct loan through the USDA's Rural Development office. Keep in mind that direct loans are intended for borrowers who have been unsuccessful in obtaining a mortgage from other lenders.

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