USDA Loans Homebuying Guide

If you're looking to buy a home in a rural or suburban area, a USDA loan could be a great option. In this guide, we'll cover everything you need to know about USDA loans, including how they work, who qualifies, and what types of homes are eligible.

What is a USDA Loan?

A USDA loan is a type of mortgage offered through the U.S. Department of Agriculture's Rural Development program. It's designed to help low—to moderate-income buyers purchase homes in eligible rural and suburban areas. One key advantage of a USDA loan is that it requires no down payment, making homeownership more accessible for those who may not have large savings. USDA loans also come with low interest rates and reduced mortgage insurance costs compared to conventional loans.

How USDA Loans Work

The purpose of the USDA home loan program is to make homeownership more accessible in rural communities. However, 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.

Who is eligible for a USDA loan?

The first step in qualifying for a USDA loan is making sure you meet the program's 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 Borrower Requirements

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 a Top 5 USDA lender in the nation. We offer expert guidance throughout the 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.