USDA Loans: A Guide for Rural Homebuyers

Welcome to the complete guide to USDA loans, a key tool for rural homebuyers. In this overview, we'll explain how USDA loans work, explore your options and answer all the questions you might have about USDA home loans, including:

• How do USDA loans work?
• Who is eligible for a USDA loan?
• What homes are eligible for USDA loans?
• Are USDA loans worth it?
• How do USDA loans compare to conventional loans?
• How do I get a USDA loan?

How USDA Loans Work

The purpose of the USDA home loan program is to make homeownership more accessible in rural communities. USDA loans offer affordable home financing as part of a broader effort to increase property ownership rates, stimulate economic growth and support the development of rural communities. But how exactly do USDA loans work?

The answer lies in their relationship with the United States Department of Agriculture (USDA). The USDA’s exact role in the home financing process depends on the type of USDA loan: guaranteed or direct.

Private lenders finance USDA guaranteed loans, but if a borrower defaults on their loan, the USDA steps in to cover part of the lender's losses. This “guarantee” allows lenders to offer favorable terms to eligible borrowers for a more affordable mortgage option with $0 down.

USDA Direct Loans

As an alternative to the USDA guaranteed loan, the United States Department of Agriculture can issue a USDA direct home loan through payment assistance subsidies. The Single Family Housing Direct Home Loan Program is designed for low and very-low-income applicants in rural areas who may find it challenging to secure financing from traditional sources.

Compared to guaranteed loans, USDA direct loans are a less common option for home financing due to their eligibility restrictions. To qualify for a USDA direct loan, a borrower must meet additional requirements, including earning income below the “low” or “very-low” thresholds and lacking access to “decent, safe and sanitary” housing.

USDA Loan Eligibility

The first step in qualifying for a USDA loan is making sure you meet the program’s eligibility requirements. USDA eligibility requirements have two distinct categories, with requirements for both the individual borrower and the property they want to purchase.

Let's break down what you need to know about USDA loan eligibility:

USDA Loan Requirements for Borrowers

To be eligible for a USDA loan, a borrower must:

1. Be a U.S. citizen or permanent resident
2. Not exceed local USDA income limits, or 115% of their area’s median income
3. Plan to make the home their primary residence
4. Meet individual lender requirements

USDA Loan Requirements for Properties

For a property to qualify for USDA financing, it must be a single-family home that satisfies the USDA’s minimum property requirements. USDA-eligible properties must also be located in a designated rural area.

Don’t be deterred by the term “rural.” The USDA’s rural designation is based on factors like population, nearby metropolitan areas and the overall availability of home financing in a given region. Luckily, the vast majority of the United States is eligible.

Benefits of USDA Loans

As you explore your options for home financing, you might wonder whether the extra steps to qualify for a USDA loan are worth it. The answer for many rural and suburban homebuyers is a resounding yes, thanks to the unique benefits that USDA loans offer.

Some of the biggest advantages of USDA loans include:

• $0 down payment
• Lower interest rates
• Flexible credit requirements
• No private mortgage insurance (PMI)
• 100% home financing

USDA Loans vs. Traditional Mortgages

To give you an idea of how USDA loans compare to traditional mortgage options, here’s an overview of how they measure up against conventional home loans:

Criteria	USDA Loans	Conventional Loans
Down Payment	No down payment required	3% to 20% down payment
Credit Score	Typically 620+	Typically 620+
Mortgage Insurance and Fees	Upfront guarantee fee and annual fee	PMI required with less than 20% down payment
Loan Limits	None	Varies by county
Income Limits	115% of median area income	None
Property Eligibility	Must be in a designated rural area	No property restrictions
Occupancy Requirements	Primary residences	Primary, secondary or investment properties

Learn more about how USDA loans compare to FHA, VA and conventional loans.

How to Get a USDA Loan

Ready to take the next step? Your journey begins with reaching out to a reputable USDA-approved lender.

Neighbors Bank is proud to be one of the nation’s leading USDA loan lenders, offering expert guidance throughout your homebuying process. From starting your application to closing and beyond, we're here to ensure a smooth transition to your new home.

Reach out to one of our USDA loan specialists to see if you qualify today, or check out our step-by-step guide to the USDA loan application process.