What Is a USDA Loan?
Quick answer: A USDA loan is a mortgage for a primary home in an area USDA treats as rural, offered to households within USDA's income limit. In the Guaranteed program, a private lender makes the loan and USDA Rural Development backs part of it, which is why the program can skip the down payment for eligible buyers. All loans subject to credit and property approval.
What does "USDA loan" mean?
"USDA loan" usually means the Section 502 Single Family Housing Guaranteed Loan, a home loan made by an approved private lender and backed by USDA Rural Development.
USDA Rural Development is the part of the U.S. Department of Agriculture that runs housing and community programs outside big cities. Its home loan programs come from Section 502 of the Housing Act of 1949, which USDA implements for the Guaranteed program in 7 CFR part 3555. The Guaranteed program's purpose, in USDA's words, is to give "low- and moderate-income households the opportunity to own adequate, modest, decent, safe, and sanitary dwellings" in rural areas, for their own use (USDA Handbook HB-1-3555, Chapter 1).
You'll also hear it called a Rural Development loan, an RD loan, a 502 loan or a rural housing loan. They usually mean the same Guaranteed program.
How does the USDA loan guarantee work?
USDA promises the lender it will cover part of the loss if a guaranteed loan doesn't get repaid, which makes lenders willing to lend with no down payment required by the program.
The loan guarantee is between USDA and the lender. You still borrow from the lender, sign the lender's note, and make payments to whoever services the loan. You don't apply to USDA yourself for a Guaranteed loan. The lender does the work, and USDA reviews it:
- The lender takes your application, checks your income, credit and the property, and underwrites the loan, usually through USDA's Guaranteed Underwriting System (GUS).
- The lender sends the file to USDA. If USDA agrees the loan meets program rules, it issues a Conditional Commitment.
- The loan closes. The lender then asks USDA for the Loan Note Guarantee, which is the formal loan guarantee.
See the full USDA loan process for what you do at each stage.
USDA Guaranteed vs USDA Direct loans
USDA has two Section 502 home loan programs: Guaranteed loans come from private lenders, while Direct loans come from USDA itself and serve lower-income households.
| Feature | Guaranteed | Direct |
|---|---|---|
| Who makes the loan | An approved private lender | USDA Rural Development |
| Who it serves | Low- and moderate-income households | Low- and very-low-income households |
| Where you apply | With a participating lender | With your local USDA Rural Development office |
| Payment assistance | None | May be available |
| Area and home rules | Eligible rural area; modest primary home | Eligible rural area; modest primary home |
Danny Nassar, NMLS 220172, originates Guaranteed loans through Canopy Mortgage, LLC. If the Direct program looks like a closer fit for your income, USDA's Texas Rural Development office handles those applications.
Who is a USDA loan for?
It's for households within the income limit who'll live in the home, can show they handle credit responsibly, can repay the loan, and can't get a traditional conventional loan as USDA defines it.
The program isn't limited to farmers or first-time buyers, and it doesn't depend on your job. What matters is income, location, occupancy and credit. The full list of borrower checks, with handbook references, is on our USDA loan requirements in Texas page.
The "can't get conventional credit" rule surprises people. USDA wants its program used by households that couldn't otherwise buy without help. The handbook defines traditional conventional credit narrowly, as having enough cash for a sizeable down payment and closing costs plus the credit and ratios for a loan without private mortgage insurance. Your lender documents how this test applies to you.
Where can you use a USDA loan?
Only in areas USDA has determined to be rural for its housing programs, checked address by address on USDA's eligibility map.
USDA's definition of rural is broader than many people expect, and it can include small towns and some areas near larger cities. The only reliable check is the exact address on USDA's map. USDA reviews its area designations periodically, including after each census, so a result can change. Learn to read the map on our USDA eligibility map for Texas page.
What can a USDA loan pay for?
Buying an existing home, building a new one, buying and repairing, and certain refinances of existing USDA loans are all eligible purposes.
- Buy an existing home, including eligible condos and certain manufactured homes. See USDA manufactured home loans.
- Build a new home with a single-close construction-to-permanent loan. See USDA construction loans.
- Buy and repair using a repair escrow or rehabilitation with purchase. See USDA renovation loans.
- Refinance an existing USDA loan. See USDA refinance in Texas.
- Reasonable and customary closing costs can be included in the loan, within program rules.
The program can't be used for investment homes, second homes, or properties used mainly to produce income, like working farms.
What does a USDA loan cost?
Expect four kinds of cost: interest, USDA's upfront guarantee fee, USDA's annual fee, and normal closing costs and prepaid items.
- Interest. Set by your lender based on the market and your file. The Guaranteed program is a fixed-interest loan.
- Upfront guarantee fee. A one-time fee USDA charges the lender, usually passed to the borrower and allowed to be financed into the loan.
- Annual fee. USDA's yearly fee, collected monthly as part of your payment. It works like mortgage insurance on other loan types.
- Closing costs and prepaids. Lender, title, appraisal and recording charges, plus prepaid taxes, insurance and escrow deposits.
USDA sets the guarantee fees each fiscal year and announces them in a notice to lenders. The fees can change from year to year. Once you apply, you'll get a Loan Estimate showing your actual costs, and Danny will walk through it with you. Sellers may contribute toward closing costs within USDA's limits, which a Texas purchase contract can spell out.
USDA loan pros and cons
The main strengths are the no-down-payment structure and flexible underwriting; the main limits are location, income caps and primary-residence-only use.
| Works for you | Limits to plan for |
|---|---|
| No down payment required by the program for eligible buyers | The home must be in a USDA-eligible area |
| Closing costs may be financed if the appraised value is high enough, within USDA's limits | Household income must fit the county limit, counting all adults in the home |
| Fixed-interest loan | Primary residence only; no investment or vacation homes |
| No program maximum purchase price | Upfront and annual USDA fees apply |
| Non-traditional credit can be considered | USDA review adds a step before closing |
How does a USDA loan compare with other loans?
USDA is narrower than FHA or conventional loans because of its location and income tests. Within those limits, the program doesn't require a down payment for eligible buyers. You'll still need cash for items like earnest money, the inspection and any closing costs that aren't financed or paid by the seller.
See feature-by-feature comparisons in USDA vs FHA loans and USDA vs conventional loans. If you're a veteran, a VA loan is worth comparing too, and Danny originates those as well.
All loans subject to credit and property approval.
Frequently asked questions
Is a USDA loan a government loan?
Yes, in the sense that a federal agency backs it. In the Guaranteed program, though, a private lender makes and services the loan. USDA reviews and guarantees it.
Is a USDA loan the same as a Rural Development loan?
Yes. USDA Rural Development runs the program, so "RD loan," "rural development loan" and "USDA loan" usually refer to the same Section 502 Guaranteed loan.
Can I use a USDA loan for land only?
No. The program finances a home. Land can be part of a single-close construction loan when you're building a home on it with a qualified builder; see our construction loan page.
Do USDA loans have mortgage insurance?
Not by that name. USDA charges an upfront guarantee fee and an annual fee instead. The annual fee is collected monthly as part of your payment.
Can I have a USDA loan and own another house?
Possibly. USDA allows applicants to keep one other home if it no longer meets their needs, they qualify to carry both, and they're not responsible for another USDA home loan by closing.
Talk with Danny about your Texas USDA loan
Tell Danny the county you're buying in and who lives in your household. He'll walk you through the USDA rules that apply to you and the next steps.
All loans subject to credit and property approval.