What Are USDA Loans?

All Metro Team February 9, 2023

What Are USDA Loans?

Mortgage rates continue to climb, making it more expensive to buy a home in 2023. For some, it may feel like the dream of homeownership is now out of reach. But don’t throw in the towel just yet. There are a variety of home loans available – especially for first-time buyers – that make it financially easier to qualify for a mortgage. FHA and VA loans are government-backed loans that many homebuyers have probably heard of. But there’s a third government-backed loan that can also help you realize your dream of buying a home. USDA loans offer great terms including low interest rates and zero down payments for those who qualify. Let’s take a closer look.

What are USDA loans?

USDA loans are mortgages that are guaranteed by the United States Department of Agriculture. They were created for low- and moderate-income homebuyers looking to purchase a home in certain rural parts of the United States.

What areas qualify for USDA loans?

Many people don’t think to check into USDA loans because they think they’re for properties in very remote areas. But that’s actually very far from the truth. In fact, about 97 percent of land in the U.S. is in an area that is eligible for a USDA loan. And you don’t need to be purchasing a farm to qualify. These loans can be used for a variety of homes including townhomes and new-construction homes.

What types of USDA loans are available?

There are three types of USDA loans. These include:

  • Direct loans – The USDA originates direct loans instead of a private lender. These are often reserved for low-income buyers and have excellent terms like low interest rates and zero percent down payments.
  • Guaranteed loans – Private lenders offer loans that are vetted and guaranteed by the USDA. If the buyer defaults on the loan, the USDA pays back the lender. This allows lenders to extend generous terms such as no money down and low interest rates.
  • Renovation loans – Homeowners can also apply for USDA loans to fund renovations on a home, including low-income seniors who may need accessibility or other upgrades.

What are the advantages of USDA loans?

There are many advantages to taking out a USDA loan, such as:

  • Low interest rates – With interest rates continuing to increase, USDA loans offer very competitive rates. Some buyers qualify for as much as half off the current market rate.
  • No down payment – Some buyers qualify to have their homes 100 percent financed, meaning no down payment is required.
  • Low credit scores OK – Buyers with poor credit don’t have to worry, as USDA loans have no minimum credit score requirement.
  • Lower mortgage insurance – Buyers paying less than 20 percent down on a home are required to pay for mortgage insurance. With a USDA loan, the rates are lower than other types of loans.

Disadvantages of USDA loans

While there are certainly many advantages to getting a USDA loan, there are some drawbacks – including eligibility requirements. Other disadvantages are:

  • Income restrictions – Buyers must meet income requirements, usually around $55,5000 annually. This varies by location.
  • Location restrictions – The buyer must purchase a home in a designated USDA area. Typically, these locations must have a population of 35,000 or less.
  • Must be your primary residence – Buyers must be purchasing a home to use as their primary residence. No investment homes or second homes are permitted.
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