What is USDA Mortgage?

What is USDA Mortgage?

A USDA mortgage, also known as a USDA/Rural Development Loan, is specifically designed to promote homeownership in rural areas, suburbs, and exurbs. By offering affordable financing options, this program aims to create thriving communities and enhance the quality of life in these regions.

Guaranteed by the U.S. Government’s Department of Agriculture, USDA mortgage loans are similar to VA home loans guaranteed by the Department of Veterans’ Affairs. One notable advantage is the option for qualified individuals to obtain a loan with no down payment. Additionally, USDA loans have a fixed interest rate and a loan term of 30 years, providing stability and predictability.
Key Highlights of USDA Loans:

  • Affordable Financing: USDA loans offer financing for properties located in designated small towns, suburbs, and exurbs. Eligible low- to moderate-income families have the opportunity to achieve homeownership without the burden of a down payment.
  • 100% Financing: Qualified borrowers can finance up to 100% of the appraised value of the property, making it easier to purchase a home without a substantial upfront payment.
  • Flexible Requirements: USDA loans have more lenient credit score requirements compared to conventional loans. This opens up homeownership opportunities for individuals who may have lower credit scores.
  • Lower Interest Rates and Closing Costs: USDA loans often feature lower interest rates and closing costs, making home ownership more affordable over the long term.
  • Gift Funds for Closing Costs: In certain cases, borrowers may be able to use gift funds to cover their closing costs, reducing the upfront financial burden.
  • Stable 30-Year Fixed-Rate Mortgage: USDA loans offer a 30-year fixed-rate mortgage, providing borrowers with predictable monthly payments and long-term financial stability.


When considering a USDA mortgage, it’s crucial to work with a knowledgeable Fairway mortgage advisor who can guide you through the process and help you determine if you meet the eligibility criteria. They will assist you in exploring all available options and ensure a smooth and successful homeownership journey.

Remember, a USDA mortgage opens doors to affordable homeownership in rural and suburban areas, empowering families to build a brighter future in their desired communities.

USDA Mortgage FAQs

What homes qualify for a USDA mortgage loan?
Eligibility for USDA mortgage loans is based on the property size, location and condition of the home. The property must fall in a USDA designated rural area, first of all. The home must also be the loan recipient’s primary residence. Loan amount limits will vary by state and county.

Who is eligible to receive a USDA mortgage loan?
Applicants must meet the USDA’s income-eligibility limit, meaning the applicant cannot exceed 115% of the area’s median household income. Since area median income varies by locale, USDA home loan income limits may vary by state and even county.
The applicant must also be a U.S. citizen, a non-citizen national or what the Department of Agriculture defines as a “qualified alien”. If you are a citizen, a permanent resident or a qualified foreign national who will live in the home as a primary residence, you will meet this requirement.

The Department of Agriculture, who guarantees USDA mortgages, dictates that the household must show that they are able to afford the mortgage payment, including property taxes, homeowners insurance and the annual USDA guarantee fee, which is payable in part at closing and the rest on a monthly basis, which is usually lumped in with the monthly mortgage payment.

What is the interest rate on a USDA mortgage loan in comparison to other loans?

What are current USDA mortgage rates?
For information on current USDA mortgage rates, please contact your Fairway mortgage advisor. Like interest rates for other loan types, these rates fluctuate due to many different factors in the market, as well as based on the applicant’s credit background.

But keep in mind, that outside of the attractiveness of a no-down payment option for qualified applicants, one of the biggest appeals of a USDA loan is that it is often offered at an interest rate lower than a Conventional loan. You can expect for that to be reflected in a slightly lower monthly payment amount. The government backing of a USDA mortgage typically means that lenders like Fairway can offer them at competitive interest rates.

Is there mortgage insurance with a USDA mortgage loan?
Not exactly, but the USDA mortgage loan process does require payment of what is called a “guarantee fee”. This fee is paid both in part at closing and in part monthly. The upfront fee paid as part of the applicant’s closing costs and then a smaller amount is paid each month, usually lumped in with the applicant’s monthly mortgage payment.

Ask your Fairway mortgage advisor about specifics regarding the USDA guarantee fee. Whether the USDA guarantee fee is cheaper over the life of the loan than the private mortgage insurance associated with a Conventional loan depends on the applicant’s credit score. Typically, the lower one’s credit score, the more advantageous it would be to pay the USDA guarantee fee vs. a conventional loan’s PMI.

Can you refinance a USDA mortgage loan?

USDA home mortgage loans can be refinanced, just like any other type of home loan. As long as your credit remains the same or improves over time and your home loan payments are up to date, you should be able to refinance into a lower interest rate and/or monthly payment when rates go down in the market.

Qualifying homeowners may also be able to skip the credit and income approval step if they are refinancing from a USDA home loan into another USDA home loan, using the USDA Streamline program.