When most people think of zero down payment mortgages, they think of VA loans – and for good reason. But did you know that there’s another powerful zero down loan program, known as the USDA loan?
USDA loans backed by the U.S. Department of Agriculture offer 100% financing, competitive rates, and low mortgage insurance costs, making them one of the most affordable financing options available to eligible buyers.
The catch? Most people think of the USDA as a government agency for farmland and buy homes in the middle of nowhere!
Actually, thousands of properties in suburban communities across New Jersey, Pennsylvania, Connecticut, Florida, and other states have access to USDA financing.
This guide explains what a USDA loan is, who can apply, what it costs, and how to apply.
What Is a USDA Loan?
A USDA loan is a government-sponsored mortgage backed by the U.S. Department of Agriculture’s Rural Development program. While the USDA is best known for providing services to farmers, the Rural Development program was created to ensure that residents of less densely populated areas have access to affordable credit.
The USDA Rural Development Single Family Housing Guaranteed Loan Program is designed to make homeownership both attainable and affordable for low-to-moderate income homeowners in eligible rural areas by guaranteeing a portion of the loan to lenders.
There are two main types of USDA loans:
- USDA Guaranteed Loan (Section 502): The most common form of USDA financing, these loans are issued through private lenders and guaranteed by the USDA. Available to moderate-income borrowers.
- USDA Direct Loan: Funded by the government, these are need-based loans for very low-to-low income borrowers who are unable to get conventional financing. Applied for directly with the USDA.
The focus of the rest of this guide is the Guaranteed Loan program, since most borrowers will work through a USDA-approved mortgage broker or lender.
The Key Benefits of a USDA Loan
1. Zero down payment
USDA loans provide 100% financing, meaning that you can purchase a home with no down payment whatsoever. USDA financing is one of only two mortgage programs that offer zero down payment financing (the other being VA loans for eligible veterans).
In hot housing markets where home prices have jumped dramatically, it can take years to save up 3%-20% for a down payment. With USDA financing, eligible borrowers can avoid tying up cash in a down payment and instead use the money for closing, relocation, and home maintenance funds.
2.Competitive interest rates
Since the government guarantees USDA loans, rates tend to be comparable to conventional loans. That means you can enjoy the benefits of a zero down payment loan at competitive rates.
3.Lower mortgage insurance costs than FHA
You’ll need to pay mortgage insurance with a USDA loan, but the good news is it’s not nearly as expensive as the mortgage insurance you’ll find with an FHA loan.
USDA mortgage insurance consists of:
- Upfront guarantee fee: 1% of your loan amount, typically added to your loan balance at closing
- Annual fee: 0.35% of the outstanding balance, paid monthly
Compare this to FHA’s upfront MIP of 1.75% plus an annual MIP of 0.55%-1.05% and you’ll quickly see the value of a USDA loan.
4.Flexible credit requirements
USDA loans are generally more forgiving to borrowers with less-than-perfect credit. While most lenders require a minimum credit score of 640 for streamlined processing, many credit scores below that threshold are still considered for USDA financing.
5.No loan limits (based on ability to repay)
Unlike conventional conforming loans, USDA loans have no maximum loan limit. Instead, the loan amount is determined by your ability to repay, not an arbitrary limit based on loan balance. This means you can purchase homes that might be out of reach on a conventional loan.
6.Seller concessions allowed
USDA loans allow sellers to contribute up to 6% of the sale price towards the buyer’s closing costs, which is among the most generous seller concession limits available. In other words, it’s possible to purchase a home with a USDA loan and have the seller pay the majority of your closing costs.
USDA Loan Eligibility: Who Qualifies?
To qualify for a USDA loan, you must meet specific income and property location requirements.
Income Eligibility
USDA loans are intended for low-to-moderate income borrowers. Your household income must fall below 115% of the Area Median Income (AMI) for your county, and this limit varies by household size.
For the Guaranteed Loan program, your household income must fall below 115% of the AMI for your county. For example, the AMI for many counties in NJ and PA is 110,000-130,000 for a family of four, meaning the maximum income to qualify for a USDA loan would be $125,250.
It’s important to remember that the USDA utilizes total household income to determine eligibility, not simply just the borrowing party’s income. Anyone who is an adult member of the borrowing party’s household can be considered for inclusion on a USDA loan application, even if they aren’t the ones purchasing the home, as long as they are contributing to household income.
You can check current income limits for your specific county using the USDA’s official income eligibility tool.
Property Location Eligibility
The property itself must be located in a USDA-eligible county. Most counties that have populations under 35,000 are considered eligible, but keep in mind that many of these eligible counties are actually suburban and within commuting distance of larger metro areas!
Many communities in New Jersey (Ocean, Burlington, Cumberland, Salem, Warren Counties), Pennsylvania, Connecticut, Florida, Indiana, and other states where My American Capital operates have USDA-eligible properties.
Check property eligibility at the USDA’s address lookup tool before assuming a property doesn’t qualify — the maps are updated periodically and some areas that weren’t eligible previously may now be.
Borrower Eligibility
In addition to meeting income and property requirements, you must also:
- Be a U.S. citizen, U.S. non-citizen national, or qualified alien
- Have the legal capacity to incur a loan obligation
- Not have been suspended or debarred from federal programs
- Demonstrate the ability and willingness to repay the loan
- Use the property as their primary residence — USDA loans cannot be used for investment properties or vacation homes
- Not currently own adequate housing — you generally cannot own another suitable property when applying for a USDA loan
What Properties Qualify for USDA Financing?
The home itself must meet several requirements:
- Type: Single-family homes,approved condominiums, townhouses, or new construction
- Condition: A modest home that is structurally sound and safe. Similar to FHA requirements, the home must meet minimum standards of health and safety.
- Use: Must be the primary residence of the borrower.
- No income-producing features: Large-scale commercial or agricultural features may disqualify a property.
- Location: Must be located in an eligible area as discussed above.
The USDA requires that the property be appraised by an approved appraiser. Properties in need of extensive repairs may be denied unless they can make repairs before or as a condition of purchase.
USDA vs. FHA vs. VA vs. Conventional: How Do They Compare?
- Down payment: USDA: 0% | VA = 0% | FHA: 3.5% | Conventional: 3%-20%
- Who qualifies: USDA: Income/location eligible buyers | VA: Military/veterans | FHA: Most buyers | Conventional: Most buyers
- Mortgage insurance: USDA: 1% upfront, 0.35%/year | VA: None | FHA: 1.75% upfront, 0.55%-1.05%/year | Conventional: PMI until 20% equity
- Credit score minimum: USDA: 640 (preferred) | VA: ~580-620 | FHA: 580 | Conventional: 620+
- Property restrictions: USDA: Eligible areas only | VA: Primary residence | FHA: Primary residence | Conventional: Flexible
- Income limits: USDA: Yes (115% AMI) | VA = No | FHA: No | Conventional: No
USDA and VA loans represent the two most powerful zero down payment options for qualifying buyers. If you’re not a veteran but qualify based on your income and the location of the property, USDA financing is a great alternative to explore. For a full look at how VA loans work for qualifying service members and veterans, please see our dedicated guide on VA loans: benefits, eligibility, and how to apply.
The USDA Loan Process: Step by Step
Step 1: Check Your Eligibility
Before proceeding, it’s a good idea to determine whether you and the property you’re considering qualify for a USDA loan. Both the income limits for your county and the property eligibility can be found online with minimal effort.
Step 2: Get Pre-Approved
Now that you’ve confirmed that you and your desired property are eligible for a USDA loan, it’s time to get pre-approved. During the pre-approval process, your lender will conduct a hard pull on your credit and review your income, employment, and debts to confirm that you qualify for a USDA loan and determine your maximum loan amount. Getting pre-approved before you shop for a home is an important step that we discuss in detail in our guide on why pre-approval matters before house hunting.
Step 3: Find an Eligible Property
Work with a real estate agent to find an eligible property that meets your needs and budget. Confirm the eligibility of each property before making an offer.
Step 4: Make an Offer and Go Under Contract
Make your offer on the home using your pre-approval letter as collateral. It’s a good idea to request seller concessions to help offset your closing costs, since the USDA allows up to 6% seller concessions.
Step 5: USDA Appraisal and Underwriting
Your lender will submit your file for underwriting. The USDA requires a USDA-specific appraisal to confirm the value and condition of the home. After your file has been approved, the lender will submit your file to the USDA for the guarantee to be issued, which will add an additional step to the approval process. This step can add 1-3 weeks to the approval timeline, so be prepared.
Step 6: Close on Your New Home
After you’ve received approval from the USDA, you’re cleared to close. The 1% guarantee fee is typically rolled into the loan so you won’t have to pay cash at closing. Review the full closing process in our step-by-step guide on the mortgage process from application to closing.
How Long Does a USDA Loan Take to Close?
USDA loans typically take longer to close than conventional loans because the property must be reviewed by the USDA. Budget 45-60 days from application to closing on average, though this can vary greatly based on the speed at which the USDA processes the loan in your state. Working with an experienced USDA lender or broker who deals with these loans on a regular basis can help speed things along.
Common USDA Loan Myths – Debunked
Myth: USDA loans are only for farmers or rural areas
Reality: USDA loans are available in thousands of suburban communities nationwide. Many of these communities are actually located within commuting distance of major metro areas! Always check the eligibility map for a property before making assumptions.
Myth: You have to have very low income to qualify
Reality: Income limits are set at 115% of the Area Median Income (AMI) for a given county. In many counties this means a household income of 110,000-140,000 or more.
Myth: USDA loans are slow and complicated
Reality: While USDA loans do have an extra step of approval, most experienced lenders and brokers can navigate the additional step with relative ease. It just takes a little extra time.
Myth: You can’t use a USDA loan to buy a nice home
Reality: There’s no maximum purchase price with a USDA Guaranteed loan – it’s all about your ability to repay. This means that in eligible areas you can buy a nice home with a USDA loan.
Is a USDA Loan Right for You?
If all of the following are true, you should strongly consider a USDA loan:
- You’re purchasing a home in a suburban or less densely populated area
- Your household income falls below the income limit for your county
- You’d like to preserve your cash savings instead of using it for a down payment
- You have a credit score of 640 or higher
- You’ll be using the home as your primary residence
- You want the lower mortgage insurance costs of a USDA loan
Find Out If You Qualify – Let’s Check Together
At My American Capital, we are experts in USDA loan programs and help buyers nationwide in New Jersey, Pennsylvania, Connecticut, Florida, Indiana, and other eligible states take advantage of this valuable zero down payment financing option.
We’ll check your income eligibility, confirm your property eligibility, compare the USDA loan with other options you have, and walk you through the entire process from pre-approval to closing day.
Think you might qualify for a USDA loan? Contact our team for a free consultation – let’s find out together.