What Is a USDA Loan?

How Does a USDA Loan Work?

The USDA's Rural Development Guaranteed Housing Loan Program offers loans to help low- to moderate-income consumers buy homes. To qualify, applicants must be looking to finance a home in an eligible rural or suburban area. The home must be intended for use as their primary residence and the homebuyer's income must fall below specific limits, which depend on local median income levels.

Densely populated urban areas of the country are excluded from the program, but that leaves 97% of the geographical U.S. as eligible for USDA home financing. The USDA's Single Family Housing Direct Self-Assessment tool can help you determine your eligibility in the area where you wish to finance a home.

Types of USDA Loans

There are three types of USDA loans:

USDA Guaranteed Loans

USDA Guaranteed Loans are issued through USDA-approved lenders, including banks and credit unions. USDA Guaranteed loans enable lenders to offer low-interest loans to borrowers who don't have a down payment and have low credit.

With a USDA Guaranteed loan, you'll need to apply through a USDA-approved lender. The USDA promises lenders it will cover 90% of any loan issued under its guidelines if the borrower fails to repay the loan.

Tip: While many lenders offer USDA loans, it's best to work with one that specializes in this type of mortgage.

USDA Direct Loans

Also called Section 203 Direct Loans, these loans are a type of low-rate mortgage issued directly by the USDA. They're available to low- and very-low-income borrowers. Loan proceeds may be used to purchase, renovate or relocate a home, or to make site improvements including installation of water and sewage services.

Rates for 502 Direct Loans hovered below 5% in early May 2025. But this type of loan offers modifications for payment assistance that could bring your rate down as low as 1%.

Loan repayment periods are typically no longer than 33 years, but 38-year loans are available to recipients who cannot afford monthly payments on a 33-year loan.

Tip: The home you wish to finance using Section 502 direct loans must meet certain requirements, including cost. Because home values vary widely by geography, each county has its own price limit for purchases made using Section 502 loans.

USDA Repair Loans & Grants

Also known as the Section 504 Home Repair Program, USDA single-family repair loans and grants are an initiative that lends funds to low-income homeowners who wish to repair or upgrade their homes.

USDA repair loans are available to applications who meet these criteria:

• Your income must fall below the "very low" limit in your county.
• You cannot get affordable credit elsewhere.
• You own and occupy the home (the program doesn't support rental properties or vacation homes).

Single Family Housing Repair Loans offer financing of up to $40,000 at a fixed interest rate of 1%, to be repaid over a period of up to 20 years.

USDA repair grants are available to applications who meet these criteria:

• You're age 62 or older.
• You cannot afford home improvement loans.
• The project must make your home safer.

You may be able to receive as much as $10,000 in USDA repair grants. You can apply for multiple grants over time, but the total lifetime grant amount cannot exceed $10,000. Also, the grant must be repaid if the property is sold within three years of the grant being issued.

You can learn more about USDA Single Family Housing Repair Loans and Grants and submit an application by contacting your regional Rural Development office.

Tip: Homeowners who can afford to make partial, but not full, repayment on Section 504 loans are eligible to apply for a combination of grants and loans to fund qualified home improvement projects, for total funding of up to $50,000.

Qualifying for a USDA Loan

Review these requirements for insight into whether you may qualify for a USDA loan.

USDA Loan Property Requirements

• The home must be modest, safe and sanitary.
• The home must be your primary residence.
• The property you wish to buy or renovate must be in an eligible rural area—use the USDA's Eligibility Site to check.

USDA Loan Borrower Requirements

• Your income must not exceed the local moderate-income limit.
• You must be able to demonstrate a stable income and creditworthiness (more on this below).
• You must be a U.S. citizen or permanent resident.

What Credit Score Do I Need to Get a USDA Loan?

The USDA doesn't have a fixed credit score requirement, but many lenders offering USDA-guaranteed mortgages require a score of at least 640. This is also the minimum credit score you'll need to qualify for automatic approval through the USDA's automated loan underwriting system. That said, some lenders may approve applicants with scores as low as 620.

If your credit score is low, or if you have no established credit history (and therefore cannot generate a credit score), you may still be able to qualify for a USDA loan through manual underwriting.

In some cases, it may be worth it to delay your homebuying plans and take time to work on improving your credit. Beyond helping you qualify for a USDA loan, building credit could expand your available loan options when you're ready to buy.

Learn more: How to Build Credit to Buy a House

How Much Does It Cost to Get a USDA Loan?

USDA loans are known for being an affordable way to buy a home, but there are some charges you'll need to be prepared for.

USDA Funding Fees

USDA loans require you to pay an upfront funding fee of 1% of the total loan amount. Also called a guarantee fee, this charge allows the USDA to make affordable mortgages available to borrowers who would otherwise struggle to qualify for a home.

Apart from the upfront fee, you'll also pay an annual funding fee of .35% of the remaining loan balance. This charge is spread out evenly among your monthly payments each year.

USDA funding fees serve a similar purpose to private mortgage insurance (PMI), which is required for a non-government-backed loan if you don't put at least 20% down. The benefit for USDA borrowers is that you won't need to pay for PMI. And, in many cases, USDA funding fees come out to less than PMI would.

Tip: You don't necessarily need to pay the upfront USDA funding fee at closing. You also have the option of financing it as part of your loan, spreading out the cost and wrapping it into your payoff schedule. This is the most popular option.

Regular Mortgage Costs

Beyond the loan-specific fees above, you'll also be on the hook for mortgage fees that buyers are typically required to pay regardless of loan type. These may include:

• Appraisal fee
• Home inspection fee
• Loan origination fee
• Credit report fee
• Recording fee

Learn more: Everything You Need to Know About Mortgage Fees

The Bottom Line

If you have steady but limited income and are interested in buying or making improvements to a home in an eligible rural or suburban area, a USDA loan could be a great option for qualifying to buy a house of your own.

Before you submit any loan applications, review your credit reports and scores to see where you stand. You can get your credit report from all three credit bureaus (Experian, TransUnion and Equifax) for free through AnnualCreditReport.com. Your Experian credit report and FICO^® Score^☉ are also available for free.