What Is a USDA Mortgage & Am I Eligible for One?
USDA mortgages are mortgages supported by the U.S. Department of Agriculture. They’re common, and available via most mortgage lenders. USDA loans have no down payment requirement whatsoever. The USDA mortgage is a true 100% mortgage, featuring below-average mortgage rates and flexible approval standards.
What Is A USDA Mortgage?
A USDA mortgage is a zero-down payment mortgage loan that can be used to buy a home; and, to refinance one.
Some of the best features of the USDA mortgage program include:
- There’s no down payment requirement to buy a home
- Mortgage insurance costs are low as compared to other mortgages
- USDA mortgage rates are below market averages
USDA loans are true 100% loan-to-value mortgages. There’s no need to save for a down payment when you use a USDA mortgage to buy a home; and, the program lets you finance loan closing costs into the purchase, too.
Home buyers using the program can buy a home with nothing down, literally. No other mortgage program can make that promise.
Getting Approved For A 100% USDA Loan
Getting approved for a USDA loan is straight-forward.
First, apply for your loan.
There are multiple ways to apply for a USDA home loan.
- Apply in-person at a bank or your credit union, if you use one
- Apply over the phone
- Apply for your USDA loan online
Each of the three methods works. You can even mix-and-match. Talk with your local bank and also with a mortgage lender through its website.
That’s completely fine.
Be sure to connect with multiple mortgage lenders about your loan. You’ll notice two things about USDA mortgages — rates are pretty much the same between banks, and customer service is not.
Some USDA mortgage lenders have more experience and are better at answering your questions. Select your mortgage lender accordingly.
As your second step, once you’ve selected a lender with which you’re comfortable, gather the paperwork necessary to approve your home loan, which can usually be submitted using photos from your phone.
Lastly, your loan will be approved.
When your loan is approved, it means that your lender has “checked the boxes” and signed off on the money for your loan. Mortgage lenders call this being cleared-to-close.
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2018 USDA Eligibility Map
Use the map below to find USDA home loan eligibility for your home. The map is based on the U.S. Department of Agriculture’s official Rural Development requirements.
The USDA does not guarantee the completeness of its rural loan information so verify your eligibility with a lender once you’re ready. However, it’s our experience that the USDA makes this statement as just a general disclaimer against liability.
Areas shaded in green are expected to be USDA loan-eligible.
How to use the USDA map
- Type your city, address, or ZIP code into the location: bar
- Locate your area on the map
- Green-shaded areas are USDA-loan eligible; non-shaded areas are ineligible
All green-shaded areas are eligible for USDA loans. Source: U.S. Department of Agriculture
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USDA Loan Eligibility Factors
If you’ve never heard of the USDA home loan, you’re not alone. For all of its good, the program is poorly marketed.
It doesn’t help that it’s known by three names, at least.
In advertising materials, you’ll alternatively read about USDA mortgages under any of the following titles:
- USDA Rural Development Guaranteed Housing Loan Program
- Section 502 Direct Loan Program
- Section 502 Loans
- The Rural Home Loan, or “Farm Loan”
- USDA 100% Loans
No matter what you call it, the 100% USDA mortgage can be an excellent fit for home buyers who want to make the smallest down payment possible on a home.
The program requires no money down, has flexible standards for approval, and lets a buyer combine its closing costs into a home loan.
USDA mortgages are true 100% home loans and getting approved for one is similar to getting approved for any other home loan type.
Buyers are asked to show evidence of income, proof of a credit score, and a willingness to repay money borrowed. They’re also required to have their home appraised and to show evidence of employment.
In this way, getting a USDA loan is no different from getting an FHA loan. However, two additional qualifiers make the USDA process unique.
The first is that, as part of your USDA loan approval, your lender will check your income against the typical income for the area. If you earn more than 115% of the area’s typical income, you can’t be USDA-approved.
Second, the USDA will do a check of your house.
Specifically, it will check that your home is “modest”, which, to the USDA, means that an average-earning buyer could afford to buy your home without putting their budget at risk.
The USDA makes exceptions, though. You can earn less than expected — or have worse credit than hoped — and still get approved.
Go for an approval, then, and compare your loan options later.
Remember: USDA mortgage rates are lower than comparable conventional mortgage and FHA mortgage rates; and, USDA mortgage insurance costs are lower.
When you can get USDA loan-approved, it’ll often be your lowest-cost, lowest-rate mortgage option.
8 Things To Know About The USDA Mortgage
There are three ways that a home buyer can buy a home with no money down.
One way is to buy a home with no money down is via the VA loan. VA loans are backed by the Department of Veterans Affair and are available to veterans and members of the U.S. armed forces; and, a subset of reservists.
Another way to buy a home with no downpayment is via a down payment assistance program.
Nationwide, there are more than 600 such programs and many are in the form of “forgivable grants.” A forgivable grant is a loan that gets wiped off the books when you agree to live in a home for some number of years — usually five.
Look up your local down payment assistance programs here.
The third way is via the USDA loan program.
The USDA loan, which is also known as a Section 502 loan, is a no-downpayment mortgage program backed by the U.S. Department of Agriculture. Loans are made through a mortgage lender and routed to the USDA for final approval.
USDA loans are available in suburban and rural areas in all 50 states. 97% of the United States meets this criterion.
Here are some of the reasons to consider a USDA mortgage.
1. USDA mortgages allow 100% financing
The USDA mortgage programs require no down payment whatsoever. You can finance the entirety of your home purchase via the USDA loan — including your mortgage closing costs.
No other loan programs let buyers finance 100% of their home and their closing costs into the same, single mortgage.
2. USDA loan mortgage rates are lower than FHA
USDA loan mortgage rates are lower than what you can get on an FHA loan or a conventional one. This is because USDA loans are guaranteed against default by the U.S. Department of Agriculture, which makes banks more willing to give loans.
Having a loan guaranty from the USDA is like having your loan co-signed. Banks feel better knowing they won’t lose money on your loan, so they’re willing to offer cheap mortgage rates.
USDA mortgage rates can beat conventional rates by 37.5 basis points (0.375%) or more.
3. USDA mortgages allow cash down payment gifts
USDA mortgages allow 100% financing for homes. Some buyers, though, prefer to make a downpayment, and that’s okay. With a USDA loan, you can make a down payment of any size — even if your down payment is a cash gift.
When you use a USDA mortgage to buy a home, your down payment can be a gift of cash from parents or other relatives; from a charitable group or foundation; or, from a downpayment assistance program in your area.
Cash gifts for down payment are allowed with USDA financing.
4. USDA mortgages are available as 30-year fixed or 15-year fixed only
A fixed-rate mortgage is a mortgage for which the interest rate won’t change for as long as you have it. USDA loans available loan term can be either 30 years or 15 years — whichever you prefer.
5. USDA loans can be used to finance home improvement projects
The U.S. Department of Agriculture makes available a special home improvement loan available to lower-income households. The loan, known formally as a Section 504 loan, offers up to $27,500 to be used for repairs such as replacing a roof or making roof repair; remodeling for accessibility of handicap persons; and, for general energy-efficiency improvements.
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6. You get access to the USDA Streamline Refinance
When you have an USDA mortgage, you get access to a special mortgage refinance program called the USDA Streamline Refinance.
The USDA Streamline Refinance, which is similar to the FHA Streamline Refinance, lets you lower your mortgage rate, quickly and easily, with reduced paperwork and an expedited approval.
To get approved for a USDA Streamline Refinance, all you have to show is that you’ve paid your mortgage on-time dating back 12 months; and that the refinance will lower your housing payment by $50 per month. That’s it.
There’s no credit score check with the USDA Streamline Refinance; nor is there a need to commission a new home appraisal.
The USDA Streamline Refinance is one of the fastest, easiest ways to refinance a home loan and it’s available exclusively to homeowners with an existing USDA-backed mortgage.
7. USDA loans can be used with below-average credit
Credit score requirements are loose with the USDA mortgage program.
The program’s official mortgage guidelines state that, to get approved, a borrower’s credit score must be 640, at minimum.
However, the USDA backs loans for borrowers whose credit scores are below 640 and, sometimes, it back loans for borrowers who have no credit score whatsoever.
For buyers with below-average credit, USDA loans are approved on a case-by-case basis. Talk with your loan officer about getting approved.
8. USDA loans can be “passed on” to other homeowners
USDA mortgages are assumable. An assumable mortgage is a mortgage that can be passed on to the future buyer of your home. If the future buyer chooses to assume your loan, it gets your same mortgage rate at the same rate — no new loans.
Imagine 5 years from now, selling your house with your current mortgage and its low rate attached. The future buyer of your home can inherit your USDA mortgage and save money on its payments.
Assumable mortgages can make your home more marketable.
Common Questions: The USDA Mortgage
Why is the USDA loan also called a “rural loan”?
USDA loans are also known as “rural loans” because the program is backed by the U.S. Department of Agriculture, and is meant to promote homeownership in areas that are lightly populated.
“Lightly populated” includes rural neighborhoods, and in many regions, it describes the suburbs, too. 97% of United States land is within USDA areas of mortgage eligibility.
I have a working farm. Can I use the USDA loan?
USDA loans are not available to households with a working farm; there are specific home loans meant for homes with a farm. However, for households with large amounts of land but no working farm, yes –100% USDA mortgages can be used for the purchase or refinance of property.
I am buying a new manufactured home. Can I use a USDA mortgage?
Yes, USDA loans can be used to purchase new manufactured homes.
I am buying a modular home. Can I use a USDA mortgage?
Yes, USDA loans can be used to purchase modular homes.
I am buying a condo. Can I use a USDA mortgage?
Yes, USDA loans can be used to purchase condominiums.
What credit score do I need to use the USDA loan?
USDA mortgage guidelines state that borrowers should have a credit score of at least 640. However, the program allows for exceptions. You can get approved for a USDA loan with credit scores below 640.
You can also get approved for a USDA if your credit score is non-existent.
If I want to make a downpayment, can I still use the USDA mortgage?
Yes, you can make a downpayment when you use the USDA mortgage program. There is no requirement to finance 100% of your purchase.
What’s the USDA maximum loan size?
There is no USDA maximum loan size, according to U.S. Department of Agriculture mortgage loan guidelines. However, the USDA enforces a maximum income limit per household.
USDA loan income limits vary by region and those limits determine how much money a household can borrow. So, technically, there’s no USDA loan size limit.
The program’s income limits may make the same effect, though.
When your loan is too big for USDA loan limits, read up on jumbo mortgage rules to see whether a jumbo loan might be right for your situation.
Can I refinance my USDA home loan?
Yes, you can refinance your USDA home loan. You can refinance into a different type of loan, such as an FHA loan or a conventional mortgage; or, you can use the specially-designed USDA Streamline Refinance loan which waives income verifications and appraisals.
How do I know if the home I’m buying is eligible for a USDA mortgage?
Every home in the United States is mapped to a USDA mortgage eligibility chart. Use the map to find out whether your home is eligible for the program.
Can I rent my USDA-mortgaged home on Airbnb?
Yes, you can rent your USDA-mortgaged home on Airbnb. However, USDA loans are for primary residences only. This means you can rent rooms to travelers as an Airbnb host, and can even rent your entire home, at times. However, the address of the house has to be where you live for the majority of the year. Otherwise, the home is not your primary residence.
Do I have to be a first-time home buyer to use a USDA mortgage?
No, you don’t have to be a first-time home buyer to use the USDA mortgage program. USDA loans are available to both first-time buyers and repeat home buyers.
What should I expect USDA mortgage closing costs to be?
USDA mortgage closing costs vary by the state in which you live, and by lender. However, as compared to conventional mortgages and FHA mortgages, USDA mortgage closing costs are typically lower.
Also, because the USDA lets home buyers finance their closing costs along with their home, USDA buyers can buy homes with nothing down and nothing out-of-pocket.
What should I expect USDA mortgage rates to be?
USDA mortgage rates are lower than mortgage rates for comparable conventional and FHA mortgages. It’s typical for USDA mortgage rates to beat the rates of other loan types by as much as 37.5 basis points (0.375%).
Remember that mortgage rates vary between lenders. Get quotes from more than one place.
How Do I Find Out More About USDA Mortgages?
The 100% USDA mortgage is a government-sponsored home loan. It’s administered by mortgage lenders on a local level. Anyone who lives within a USDA eligibility zone can apply.
USDA loans can be used to buy a home or refinance one; and, they can be used by both first-time home buyers and repeat buyers of homes.
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