A USDA loan is a $0 down payment mortgage option for homebuyers considering purchasing in eligible rural areas.
Location and income are the two primary eligibility considerations. USDA loans aim to help low-to-moderate income buyers, so the USDA limits how much you can make in a year.
Apart from VA loans, USDA loans are one of the last remaining $0 down payment programs. USDA loans also generally have lower upfront and ongoing fees than FHA loans.
USDA loans are only eligible to people living in the designated rural areas. Fortunately, eligible rural areas make up much of the U.S. and include many small towns and suburbs of metropolitan areas.
The USDA doesn't stipulate a minimum credit score requirement. However, homebuyers need a 640 or higher to use the USDA's Guaranteed Underwriting System (GUS). Lenders may accept a lower score, but prepare for a manual underwrite.
Private lenders and banks make USDA loans, while the USDA backs a portion against loss. The only time the USDA acts as the lender is with the USDA direct loan - only meant for low and very-low-income applicants.
The USDA loan process is similar to any other mortgage. You'll need to start with a lender to verify income and assets, find a USDA-eligible home, sign a purchase agreement, go through underwriting and finally approval.
USDA loans have an upfront fee and an annual fee. The upfront fee is 1% of the loan amount while the annual fee is only 0.35%. For comparison, FHA requires a 1.75% upfront fee and typically 0.85% in mortgage annual insurance.
Applying for a USDA loan begins with talking to a lender. A lender will verify your income, credit and can help ensure your searching for homes in USDA eligible areas.