What Are USDA Home Loans?

USDA home loans are available to low and very low-income borrowers in rural areas. If you aren't able to qualify for a traditional mortgage, you may be eligible for the USDA home loan program.

Here's some more information if you are interested in obtaining this type of mortgage loan:

First, what is considered a rural area?

A rural area is defined as an area with a population of less than 35,000. This includes many communities within a reasonable commute of larger cities -- about 97 percent of the geographic United States is eligible.

You can search eligible areas on the USDA website.

What properties are eligible?

You can purchase any property of your choosing within eligible areas subject to certain requirements:

• You must use the property as your primary residence.
• The size of the home can't exceed 2,000 square feet.
• Homes with in-ground swimming pools are not eligible.
• Market value based limitations may also apply.

Who exactly is eligible for this type of loan?

To qualify for a USDA home loan, you need to have an income that is below the limit for your metropolitan area and family size.

Additional financial requirements include the following:

• The monthly mortgage payment cannot exceed 29 percent of your income.
• Your total debt payments cannot exceed 41 percent of your income.
• You should have two years of steady income history.
• You should have no negative credit history within the past 12 months.

So, how do USDA loans work?

USDA home loans have relaxed underwriting requirements to allow borrowers who wouldn't qualify for other mortgages to purchase a home. Generally, a down payment isn't required, but not making a down payment could increase your total loan costs.

If you're approved for an USDA home loan, it works similarly to other mortgages.

• Your interest rate is determined by your credit score.
• You must pay mortgage insurance at the rate of 1 percent of the mortgage amount at closing plus 0.35 percent of the remaining balance per year.
• The repayment term can be as long as 38 years depending on your income.

How do you apply for a USDA home loan?

USDA loans are backed by the federal government, but you must apply through a participating mortgage lender.

Want to learn more? See if you meet the requirements to qualify for a USDA home loan.