What Is a USDA Loan?

With mortgage interest rates hovering in the low 6% range and home prices keeping around $415,000, many homebuyers are eager to find ways to afford property and keep monthly payments low. 

While there are a variety of mortgages aimed at helping homebuyers afford a place of their own, one option that is often overlooked is USDA loans. 

These loans offer excellent terms to those who qualify, including low interest rates and a 0% down payment.

Here’s everything you need to know about USDA loans and who is eligible for this type of financing. 

What is a USDA loan?

A USDA loan is a mortgage that is either issued or guaranteed by the U.S. Department of Agriculture. Also known as Section 502 or 504 loans, these programs are reserved for people with low or moderate incomes.

According to the U.S. Census Bureau, 97% of land is located within USDA-eligible boundaries, with 1 in 5 Americans living in rural America. 

(Homes for sale listed on Realtor.com® will typically indicate if they're eligible for USDA loans.)

However, relatively few people take advantage of these loans. In the fiscal 2024 year, the USDA issued roughly 49,000 loans, guarantees, and grants through its Rural Development agency, totaling approximately $7.7 billion

One of the reasons for this may be that many presume these loans are relegated to extremely remote areas. But the reality is that USDA mortgages are surprisingly versatile and can be used not only to buy property in suburbs, but also to fund new construction or renovate an existing home.

Different types of USDA loans

There are three types of USDA loans:

1. Direct loans

These loans originate directly from the USDA, with no private lender involved. They are usually reserved for very low-income applicants with extremely generous terms, like 0% down.

2. Loan guarantees

These mortgages are offered by private lenders that have been approved by the USDA, which then guarantees the loan. This reduces the risk for lenders because if the homebuyer defaults on the mortgage, the government will pay the lender back. 

3. Home improvement loans and grants

These grants allow homeowners to repair or improve their home. They may also be available to low-income senior citizens who need to upgrade for health or safety reasons.

USDA loans: Pros and cons

Benefits of USDA home loans

USDA loans come with a variety of benefits that can help make homeownership more affordable:

• 0% down payment: Loans of up to 100% of the home’s value allow eligible buyers to put no money down, compared with other loans that may require 3% to 20% down.
• Lower interest rates: Because of the government guarantee, lenders can offer incredibly competitive rates, even lower than FHA loans and other assistance programs. In fact, the interest rate may be as much as 50% less than the market rate.
• Reduced mortgage insurance: Typically, borrowers paying less than 20% down on a home purchase will have to also pay for mortgage insurance. This protects the lender in case the borrower defaults on paying back the loan. But the rates on insurance for USDA loans is generally lower—currently about 1% upfront and 0.35% annually for the life of the loan. For comparison, FHA loans charge 1.75% upfront and around 0.80% to 1.05% annually for insurance.
• Lower credit score requirements: There is no minimum credit score requirement when getting a direct loan from the USDA, however a lender is allowed to use its discretion. Typically, 620-plus is the sweet spot for lenders. 
• Lower closing costs and other fees: Another major savings opportunity are low origination fees if working with a USDA-approved lender. Closing costs, legal fees, and other prepaid fees may typically be rolled into the loan balance and paid off over time. 

The restrictions of USDA loans

Here's a closer look at these restrictions:

• Geographic limitations: The most recent qualifications have a lot to do with population density. An area qualifies if it has 10,000 or fewer residents, or if it has 10,001 to 20,000 residents and is outside a Metropolitan Statistical Area with a shortage of affordable home loans for low-income families. Areas with 20,001 to 35,000 residents must have previously been classified as rural in the 1990, 2000, or 2010 Census and also face a significant lack of affordable mortgage options.
• Income thresholds: Borrowers must meet specific income requirements based on where they live, and if those income limits are exceeded, they cannot qualify. Generally, an individual is considered a low-income earner if their household income is less than double the federal poverty level.
  In 2025, the Department of Health and Human Services determined that the FPL for the 48 contiguous states and the District of Columbia is $15,650 for a single-person household and $32,150 for a family of four. So if you double that, an individual cannot make more than $31,300 on their own or $64,300 as a family of four and qualify for a USDA loan. But again, this varies widely by area, so check your local stipulations.
• Primary residence stipulations: “USDA loans are set up in a very intentional way to help people get into primary residences,” explains Jake Vehige, president of mortgage lending at Neighbors Bank. In other words, you can't get a USDA loan for that vacation home you've always wanted. You can, however, use the same loan when you’re ready to buy another home.

Applying and qualifying for USDA loans

Qualifications for USDA loans will vary based on the type of loan a borrower is getting:

Direct loan applicant requirements

• Must be without decent, safe, sanitary housing.
• Must be unable to obtain financing from other sources.
• Adjusted income must be at or below the low-income limit for the area.
• Must meet citizen or eligible noncitizen requirements.
• Must agree to occupy the dwelling as a primary resident, and not for income-producing activities.
• Home purchased must not exceed 2,000 square feet.

Guaranteed loan applicant requirements

• Applicants must have a steady income and enough savings/assets to make mortgage payments for at least 12 months.
• Must agree to occupy the dwelling as a primary residence.
• Must be a U.S. citizen, a U.S. noncitizen national, or a qualified alien.

Repair/renovation loan and grant applicant requirements

• Must be the homeowner and occupy the house for which they're applying for the loan.
• Unable to obtain affordable credit elsewhere.
• Have a household income that does not exceed their county's "very low income" threshold (50% of the area median income).
• Must use the funds to repair or improve the house, or remove health or safety hazards.

How to get the best USDA mortgage rates

With current interest rates on conventional loans hovering in the low 6% range, USDA loan interest rates are extremely forgiving by comparison. While the exact rate will vary based on the borrower and the time of closing, here's a snapshot of what borrowers can expect:

• Direct loans: As of Dec. 1, 2025, the current interest rate for Single Family Housing Direct home loans is 5.00% for low-income and very low-income borrowers. This rate remains fixed for the life of the loan, which can be paid back over 33 to 38 years.
• Guaranteed loan: The interest rate will be determined for the borrowers by the USDA-approved lender.
• Repair/renovation loan: The interest rate is set at 1%, with a 20-year payback term.

Homebuyers who want to apply for a USDA loan can consult with their local Rural Development agency, which can connect them with a housing specialist or a USDA-approved lender.

Prospective borrowers might also want to research eligibility requirements, particularly in terms of income limits and the area where they're looking to buy.

Additional edits and information provided by Dina Sartore-Bodo.