USDA Loans: Advantages, Disadvantages, Eligibility | Loan Pronto
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by Amanda Charalambous / Jul 19, 2021

USDA Loans: Advantages, Disadvantages, Eligibility

Do you prefer the rural side of life? The U.S. Department of Agriculture (USDA) supports rural homeownership through its Single Family Housing Direct Home Loan, Single Family Housing Guaranteed Loan, Home Repair Loan and Grant, and Mutual Self-Help Housing Grant programs. By providing affordable homeownership opportunities to low- and moderate-income households, the USDA intends to create thriving communities and improve the quality of life in rural areas. Since 1949, the USDA has helped 4.7 million families and individuals buy homes in rural America. 

What is a USDA loan?

By offering no money down financing, USDA loans make homeownership possible for low- and moderate-income families in rural areas. To be eligible for program assistance, the household must meet certain guidelines and be located in an eligible area as defined by the USDA. Generally speaking, rural areas are defined as open country with a population of less than 35,000 people. The USDA’s broad definition makes approximately 97% of the nation’s land eligible, which includes an estimated 100 million people. Consult the USDA Income and Property Eligibility Site to determine if you’re right for this program.

Still thinking about applying for a USDA loan? Let’s first review the advantages and disadvantages of USDA loans and the many requirements needed to be eligible for the Single Family Housing Direct Home Loan and Single Family Housing Guaranteed Loan programs.


Advantages of USDA loans

Compared to conventional mortgages or FHA and VA loans, USDA loans provide many advantages for rural homebuyers. USDA loan advantages include:

  • No down payment

Unlike other mortgage loans, borrowers won’t need to provide a down payment for USDA loans. 

  • Low rates

Rates on USDA loans are typically lower than those on conventional or FHA loans.

  • Low credit score

The USDA loan programs do not mandate a minimum credit score to qualify.

  • Low origination fee

Borrowers pay a guarantee fee of just 2% of the total loan amount. This fee can either be paid up front or rolled into the mortgage loan amount. 

  • Streamlined refinancing process

The USDA’s streamlined assist refinance loan program speeds up the process in roughly three weeks. No credit reports, home appraisal, or property inspection needed.

Disadvantages of USDA loans

There are disadvantages to USDA loans that you may not encounter with conventional mortgages or FHA and VA loans. USDA loan disadvantages include:

  • Geographical requirements

Homes must be located in eligible rural areas as defined by the USDA.

  • Income limits

Borrowers must meet specific income requirements based on where they reside. 

  • USDA up-front fee

While borrowers must pay a guarantee fee of just 2%, the required up-front fee could be thousands of dollars depending on the loan amount. 

  • Primary residence requirement

To be eligible for USDA loans, borrowers must use the home as their primary residence. Second properties or vacation homes are not applicable.

Single Family Housing Direct Home Loan Program

Also known as the Section 502 Direct Loan Program, the Single Family Housing Direct Home Loan Program provides loans directly to families and individuals so they can buy or build a home in rural America. This program assists low- and very low-income applicants in obtaining decent, safe, and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Through this program, the USDA has helped 2.2 million families and individuals purchase a home. 

To be eligible for Single Family Direct Home Loans, you must:

  • Be without decent, safe, and sanitary housing
  • Be unable to obtain a loan from other resources
  • Agree to occupy the property as your primary residence
  • Have the legal capacity to incur a loan obligation
  • Meet citizenship or eligible noncitizen requirements
  • Not be suspended or debarred from participation in federal programs


Properties financed with direct loan funds must:

  • Generally, be 2,000 square ft or less
  • Not have market value in excess of applicable area loan limit
  • Not have in-ground swimming pools
  • Not be designed for income producing activities

Single Family Housing Guaranteed Loan Program

Also known as the Section 502 Guaranteed Loan Program, the Single Family Housing Guaranteed Loan Program assists approved lenders in providing low- and moderate-income households the opportunity to own safe and sanitary housing as their primary residence in eligible rural areas. 

To be eligible for the Section 502 Guaranteed Loan Program, you must: 

  • Meet income eligibility (cannot exceed 115% of median household income)
  • Agree to personally occupy the household as your primary residence
  • Be a U.S. citizen, U.S. non-citizen national or Qualified Alien

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