What Are the Pros and Cons of a USDA Loan?

USDA Loans require no down payment and offer low-interest rates. Backed by the U.S. Department of Agriculture, these loans are extended to low- and moderate-income families looking to purchase a primary residence in a rural area. 

usda loan

Specifically, USDA Loans began when the U.S. Department of Agriculture introduced the Single Family Housing Guaranteed Loan Program in 1991. Since that time, USDA Loans have helped hundreds of thousands of people purchase homes in areas with a population under 35,000. In 2019 alone, USDA Loans were issued to nearly 100,000 borrowers. 

As with many loan options, there are pros and cons to USDA Loans. 

Pros: 

  • No Down Payment. Since USDA loans are backed by the government, borrowers are able to secure them with 0% down. This removes a barrier to would-be borrowers in lower-income brackets. 
  • Low-Interest Rates. Conventional or FHA loans often have higher interest rates than USDA Loans. As of February 2021, USDA Loans were at 2.803% APR. 
  • No Mortgage Insurance. Instead of typical mortgage insurance, USDA Loans only require borrowers to pay 2% of the total loan amount as a guarantee. Even better, this 2% can be rolled into the final mortgage amount instead of being paid upfront. 
  • Low Credit Score. If a borrower has a low credit score or a fractured financial past, a USDA Loan might be a great option. So long as borrowers can demonstrate the ability to repay the loan, there is no minimum credit score requirement. 

Cons: 

  • Geographical Requirements. USDA Loans are reserved for rural areas with populations less than 35,000. This rules out borrowers in metropolitan areas. 
  • Property-type Restrictions. USDA Loans aren’t applicable to business property, second homes, or vacation properties. The property must be the buyer’s primary place of residence. 
  • Income Limits. These limits vary depending on location, but if you exceed income limitations you might not qualify for a USDA Loan. 
  • USDA Upfront Fee. The 2% fee added to your mortgage amount might not seem like much but can be several thousand dollars depending on the mortgage amount. 

USDA Loans are ideal for many borrowers. It’s a great option if you qualify! 

Still unsure? First Lenders can answer your questions!