What are the types of USDA loans?
There are three types of USDA loan programs:
- Loan guarantees: The USDA guarantees a mortgage offered by a local lender, similar to how an FHA loan or VA loan works. With this type of loan, you may qualify with no money down, but you'll then need to pay a mortgage insurance premium.
- Direct loans: These loans are issued by the USDA itself for low-income applicants. They can have mortgage interest rates as low as 1%.
- Home improvements loans and grants: These give homeowners money that doesn't need to be repaid and is to be used to update their homes. These packages can amount to up to $40,000 for loans and $10,000 for grants. The two can be used together.
How to apply for a USDA loan
Applying is easy with these steps.
1. See if you qualify
You can consult the table linked above to see what income limits look like based on where you live and are looking to buy. At the same time, check your credit. Ideally, you should aim for a credit score of 640 or above for an easier time qualifying. Also, check your credit reports to make sure there are no red flags that would disqualify you, like an overdue debt in collections.
The last thing you want to do is get in over your head and take on a mortgage that's too high. Look at your budget and figure out what you can afford -- use our monthly mortgage payment calculator to estimate the cost of different types of mortgages. You can also consult our beginner's guide to home loans, which not only reviews different mortgage types, but also explains what goes into a mortgage payment.
USDA mortgages don't require a down payment. Still, if you receive a down payment gift from a generous friend or family member, you're welcome to use it for up to 100% of your down payment. (Not all mortgage types allow this.)
3. Shop around for a great offer
It's always a good idea to seek out multiple mortgage offers rather than settle on the first one you get. Contact a few different USDA mortgage lenders to see what rates you qualify for.
With a USDA loan, you could become a homeowner with little or no down payment, so it pays to see if one of these mortgages is right for you. And if you don't qualify immediately, you may want to work on making yourself a better loan candidate by dealing with delinquent debt or waiting until you've been at your job for at least two years. Though there are other mortgage types that let you buy a home with a minimal down payment, it's worth doing what you can to take advantage of a USDA mortgage if you're buying in a rural part of the country.
Still have questions?
Here are some other questions we've answered: