7 Things First-Time Homebuyers Should Know About USDA Loans

Buying a home is exciting, but to many first-time homebuyers, it can feel overwhelming and generate many questions.

Fortunately, there are several programs designed to help homebuyers. The USDA loan is one government program focusing on borrowers in rural areas.

Here's what a USDA first-time homebuyer needs to know.

1. No Required Down Payment

The USDA grants first-time homebuyers a zero-down payment mortgage. This is a significant advantage of the program, as qualifying first-time homebuyers don't have to save for a down payment. With no required down payment, USDA loans offer committed buyers a quick and easy path to homeownership.

2. Not Just for First-Time Homebuyers

The USDA loan program is not limited to your first home purchase. USDA loans are available to first-time and repeat borrowers as long as they meet all program requirements. If your first home isn't your forever home, you may have the option to take out another USDA mortgage.

3. Must Live in a Qualifying Rural Area

Borrowers must live in an eligible rural location to qualify for a USDA loan. The program's mission is to help people in rural areas purchase residential property. The good news is that the USDA broadly defines rural areas as open country that is not part of an urban area. By this definition, many suburban areas also qualify for USDA loans.

4. Flexible Credit Guidelines

USDA loans have no official minimum credit score to qualify. You may even be able to qualify with a low credit score or with no credit score at all. Because the federal government guarantees the loans, lenders see minimal risk in the transaction. This gives lenders more flexibility to consider your ability and willingness to repay based on other aspects of your finances.

That said, USDA lenders typically want to see a minimum credit score of 640 or better. This allows for the USDA’s Guaranteed Underwriting System (GUS), which automates the credit risk evaluation process.

5. Must Be Below the Income Limit

Because the USDA loan is designed to help low- and moderate-income borrowers, it does come with an income limit. This is the maximum amount you can earn in a year and still qualify for a USDA loan. The income limit varies depending on your location and household size and takes into account the income of all members of your household. To calculate your personal income limit, visit our USDA income limit calculator.

6. Competitive Interest Rates

Because of the USDA guarantee, lenders can offer surprisingly low mortgage interest rates to buyers. In fact, USDA loan interest rates are often some of the lowest on the market. It's important to understand that your credit score will also influence the interest rate a lender is willing to offer. In general, buyers with higher credit scores and lower debt-to-income ratios get the best interest rates, but USDA backing should help keep yours affordable even if your numbers aren't perfect. 

7. Low Mortgage Insurance

USDA loans don’t require private mortgage insurance (PMI), but instead have their own form of mortgage insurance, which consists of two charges: the upfront guarantee and an annual fee. On a USDA loan, the upfront guarantee is just 1% of the total amount of the loan. Buyers do not have to pay this in cash at closing and can instead roll the fee into the loan. On a 30-year FHA loan, this upfront guarantee is 1.75%—nearly twice as much. A USDA loan usually has an annual mortgage insurance fee of 0.35%, compared to 0.85% on an FHA loan.