USDA Loans: Rates, Terms and Eligibility

USDA loans feature affordable interest rates, no down payment and no mortgage insurance. While you’re required to buy a home in an eligible rural area and meet certain income limits to qualify, this loan program aims to make homebuying more affordable for low-to-moderate-income borrowers.

Here’s what you need to know before applying for a loan guaranteed by the U.S. Department of Agriculture (USDA).

Key takeaways

• USDA loans are meant to help low- to moderate-income borrowers become homeowners.
• They feature no down payment or mortgage insurance requirements and affordable interest rates compared to conventional loans.
• To qualify, however, you must be willing to purchase a home in an eligible rural area.

Types of USDA loans

There are three types of USDA loans available to borrowers who qualify for the program. They all feature no down payment or mortgage insurance requirements, but there are a few distinct differences between them.

USDA direct loans

Low-income and very-low-income borrowers who are interested in purchasing a home in an eligible rural area may qualify for a loan through the Section 502 Direct Loan Program. This program is meant to help those who are without safe housing or can’t qualify for a loan through more traditional means, so it has some unique features, including:

• Interest rate: The program’s mortgage interest rates are currently capped at 4.375%, but they can go as low as 1% following payment assistance.
• Repayment term: The loan term on a USDA Direct Loan can be extended up to 38 years in order to make mortgage payments more affordable.

USDA guaranteed loan

The Section 502 Guaranteed Loan Program — also known as USDA guaranteed loans — helps low- to moderate-income borrowers purchase homes in eligible rural areas. Unlike USDA direct loans, approved lenders offer USDA guaranteed loans rather than the USDA itself.

Instead, the USDA guarantees 90% of the loan for participating lenders, which means that they can offer more favorable loan terms, including:

• Repayment term: All USDA guaranteed loans are 30-year fixed-rate mortgages.
• Credit score: Borrowers won’t have to meet any minimum credit score requirements.

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USDA construction loans

Low- to moderate-income borrowers looking to build a home in a rural area can use a USDA construction loan for the task. This program combines a USDA guaranteed loan with a construction loan in one, so you won’t have to refinance your mortgage once construction is complete.

How to qualify for a USDA loan

Here’s a closer look at the specific eligibility requirements you’ll need to meet if you choose a USDA loan.

How to get the best USDA loan rates

Getting your finances in order is the best way to improve your odds of receiving the best USDA loan rates. Here are a few ways to strengthen your financial standing.

• Work on your credit score. The higher your credit score, the better your interest rates — so take steps to boost your credit score before applying for a USDA loan.
• Make a down payment. While USDA loans don’t require a down payment, putting money down shows the lender you’re serious about repaying the loan as agreed.
• Tackle current debt. Paying off debt can reduce your debt-to-income (DTI) ratio — which lenders love — and also show that you have the funds available to pay your loan back.
• Compare lenders. It’s important to shop around with several lenders to compare interest rates, fees, closing costs and loan terms and find the best deal.

USDA loans compared to conventional loans

Down payment

While a USDA loan doesn’t require a down payment, conventional loans typically require at least a 3% down payment.

Fees

If you put down less than 20% on a conventional loan, your lender will require you to pay for private mortgage insurance (PMI). PMI isn’t required for USDA loans.

However, USDA guaranteed loans do charge a guarantee fee. This fee is charged both upfront at closing and on an annual basis. The upfront guarantee fee is 1% of the loan amount and the annual guarantee fee is 0.35%.

The initial guarantee fee can be rolled into the total loan amount, while the annual guarantee fee is typically included in your monthly payment.

Interest rates

There are a number of factors that determine a mortgage rate, including your credit history, loan term and the economy. Interest rates for USDA direct loans are currently 4.375%, while interest rates for USDA guaranteed loans will vary by lender.

The average interest rate for USDA guaranteed loans currently sits around 6.50%. Meanwhile, the current interest rate for a conventional 30-year fixed mortgage is 6.78%.

Loan terms

The loan term for a USDA guaranteed loan is a fixed-rate, 30-year term, much like the standard conventional loan.

For a USDA direct loan, borrowers have up to 33 years to repay the loan. For very-low-income borrowers, that period may be extended up to 38 years to make it more affordable.