How Do USDA Loans Work?

If you qualify for a USDA home loan, then you have a fantastic opportunity to secure a mortgage with zero down payment and at a competitive interest rate. Available to both first-time and recurring buyers, the USDA home loans are provided by private lenders but guaranteed by the U.S Department of Agriculture (USDA).

The biggest reason to apply for a USDA home loan is getting a government-backed home loan for a $0 down payment. Offered through the Office of Rural Development, USDA loans are meant to boost home ownership in rural areas. Similar to other mortgage options backed by the government, such as VA loans, USDA loans require the borrower to go through the following steps to secure the home loan:

  1. Collaborate with a USDA-approved private lender
  2. Get pre-approved
  3. Put in the offer for a home
  4. Complete the USDA loan appraisal process
  5. Lender underwriting
  6. Close the deal

Types of USDA Home Loan Programs

Following are the three types of USDA home loan programs:

1. Guaranteed Loan

Similar to VA or FHA loans, USDA Guaranteed loans are provided by USDA-approved lenders and they allow borrowers to get low mortgage interest rates. However, since these loans are guaranteed by the government, they are a little stringent in their credit score requirement. To qualify for a guaranteed loan, a borrower must have a credit score of 640 or over.

2. USDA Direct Loan

As the name suggests, USDA direct loans are loans obtained directly from the U.S Department of Agriculture. Designed for people in the low to very-low income group, direct loans are issued by the USDA and have interest rates that vary according to the region. In some places, the interest rate can be as low as 1%.

If you earn between 50% and 80% of the average local median income, then you are eligible to apply for a USDA direct loan. Compared to the standard thirty years, the direct loan has a longer duration of 38 years. Additionally, lower interest rates make monthly payments more affordable. To secure the loan, potential borrowers need direct assistance from the local office of Rural Development.

3. Home Improvement Loan and Grants

The third and final type of loan offered under the USDA home loan program is the home improvement loans and grants. Obvious from the name itself, home improvement loans and grants allow borrowers to renovate or upgrading their existing home. The loan amount can be as much as $27,500.

Basic Requirements to Qualify for a USDA Home Loan

You are eligible to apply for a USDA home loan if:


  • You are a U.S citizen or permanent resident
  • The monthly mortgage payment is less than 30% of what you earn each month. The monthly payment includes the principal, interest, insurance, and taxes.
  • You have a dependable income for at least a year
  • You have a decent credit history i.e. meet a minimum requirement of a 640credit score

If you meet the above requirements and are looking to pre-qualify for a USDA home loan, then we can help you with that. Get in touch with us today to find out how best to apply for a USDA home loan!