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USDA loans: How to qualify in 2024

Hal Bundrick
Updated 4 min read

If having a little land and a decent home outside of the city is a priority for you, a USDA loan may be your road to rural living. USDA mortgages finance the purchase of residential properties outside of urban areas, often with no money down.

What does it take to qualify, and how do USDA loans work? Yahoo Finance has the latest details.

Read more: What are government home loans?

To encourage strong communities and affordable housing, the United States Department of Agriculture's Rural Development program guarantees loans for approved lenders. USDA mortgages are issued to low- and moderate-income households in qualifying rural areas. You do not have to be a first-time home buyer to qualify.

USDA home loans offer 0% down-payment financing and flexible credit terms within household income limits.

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For the purchase of a primary residence, USDA offers two loan programs: Guaranteed Loans and Direct Home Loans.

USDA Single Family Guaranteed Loans are available through approved private lenders, such as banks, credit unions, or mortgage companies. Because the USDA guarantees a portion of the loan, mortgage lenders can offer these loans with no down payment required.

The program is tailored for low- to moderate-income households earning no more than 115% of the local median household income.

USDA Single Family Direct Home Loans are for very low- and low-income borrowers and provide payment assistance to households with income at or below the local low-income limit. The loans are issued directly by the USDA rather than through traditional lenders. Loan applications are made through USDA state offices.

Tip: When it comes to strategies to get the lowest mortgage rates, USDA Direct Home Loans stand apart. After factoring in payment assistance, your interest rate can fall as low as 1%.

Specific loan requirements vary by lender, but generally, USDA loans require a borrower to:

  • Qualify within the local income limits.

  • Use the property as a primary residence.

  • Buy a property in an eligible area.

  • Qualify for a monthly mortgage payment that is no more than 29% of a borrower's gross monthly income.

USDA loans do not have a minimum credit score qualification, though borrowers must "demonstrate a willingness and ability to handle and manage debt." However, private lenders issuing the mortgages may have additional eligibility requirements, often including a minimum credit score of 580.

Read more: Debt-to-income ratio (DTI) — Why it matters and how to calculate it

To defray the cost of the guarantee provided to lenders, the USDA charges mortgage lenders a fee, which may be passed on to the borrower. The guarantee fee is essentially a form of USDA mortgage insurance. There is a one-time fee paid as a part of closing costs that is a percentage of the total loan amount — and an ongoing annual fee that lasts the life of the loan.

Read more: What is mortgage insurance, and how much does it cost?

  • In most cases, no down payment is required.

  • Payment assistance can be provided to low-income borrowers.

  • Has an upfront and ongoing guarantee fee.

  • No option to use an adjustable-rate mortgage.

  • You may not qualify if your income is over acceptable limits.

Learn more: A guide to USDA streamlined refinance loans

A USDA loan is a mortgage insured by the United States Department of Agriculture. It's for lower-income home buyers buying land in qualified rural areas.

Yes, if you qualify for a USDA loan, it's often a good idea compared to other types of mortgage loans. You don't need a down payment, and USDA loans usually have lower rates than conventional loans.

The main downside of a USDA loan is that it's difficult to qualify for. You must earn a low-to-moderate income, and you can only use a USDA loan for properties in eligible areas. You also don't have the option to get an adjustable-rate loan like you would with some other types of mortgages — and ARMs usually start with lower rates than fixed-rate mortgages.

The most common reasons for being denied a USDA loan are that you earn too much money to qualify or the house you want to buy isn't in an eligible area. You would also be denied if your monthly mortgage payment is more than 29% of your gross (pre-tax) income.