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What is a USDA Home Loan and How to Qualify?

August 8, 2022

Thinking about buying a home but your credit score leaves a lot to be desired? That doesn't mean you're out of luck. If you forego living in the city and find a house in a rural area, then you might apply for a U.S. Department of Agriculture (USDA) mortgage loan. These are designed to assist those who don't qualify for traditional loans. However, they do come with some caveats and requirements to obtain one.

In this article, we're going to break down everything you need to know about USDA loans, how to qualify, and what are the advantages and disadvantages of taking one.


What is a USDA Home Loan?

As mentioned, a USDA home loan is a mortgage assistance program created by the United States Department of Agriculture that first began in 1991. Initially, it started as a Single-Family Housing Guaranteed Loan Program where the money was distributed by local lending partners and guaranteed by the government. Since its inception, it's expanded to include direct loans for home purchasing and home repairs. The goal of the program is to support low-income families in designated rural areas around the country by providing access to grants and loans without a down payment and with interest as low as 1%.


Explaining How USDA Home Loans Work

The USDA offers three types of programs.


The first type is a loan guarantee where the loan is given by a local lending partner, but it's backed by the government. They don't require a down payment and come with very little interest. However, if you can provide a down payment, then you can avoid paying a mortgage premium.

The second type is a direct loan given by the USDA to those who fall into the "low" to "very low" income bracket, where the exact income amount is determined by the area. These are given directly from the government and offer low interest rates as well.

The third type is USDA home repair and improvement loans or grants that are given to homeowners in rural areas to help fix or upgrade their existing house.


Who Qualifies for a USDA Home Loan?

While income requirements vary by the locality (you can check the USDA site to see for your area), there are some common ones no matter where you wish to reside. These are the following:


  • You must be a U.S. citizen or have permanent residency.
  • You must have a source of "dependable" income for the past two years.
  • You will need to make a monthly payment that doesn't exceed 29% of your monthly income and not have other financial obligations above 41%.
  • You can't have a home already that's in acceptable conditions.
  • A credit score of 640 for the streamlined process, but lower scores may still qualify.


What are the Pros and Cons of a USDA Loan?


  • Low interest rates
  • $0 down payment
  • Low credit score requirements
  • Reduced origination fee
  • Streamlined process with a credit score 640+



  • Strict region requirements
  • You can't own a second home
  • Strict income limits
  • Up-front fees
  • Strict streamlined process requirements


That's the nitty-gritty of everything concerning USDA home loans. It's a great program for those in need, although there are strict requirements so only those who need it the most get it.


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