USDA loans do not require a down payment

A USDA loan is a mortgage backed by the U.S. Department of Agriculture, designed for people buying homes in rural areas. Unlike conventional mortgages, USDA loans let you borrow 100 percent of the home's purchase price — meaning you can buy a house with no money down.

This is one of the main reasons USDA loans exist. The program was created to help people in rural communities build wealth through homeownership when they might not have savings set aside for a down payment. If you meet the income and location requirements, you genuinely do not need to bring cash to closing.

That said, "no down payment required" does not mean "no money required at all." You will still need to pay closing costs, which typically run 2 to 5 percent of the loan amount. Some USDA lenders will roll these costs into your loan, but others require you to pay them upfront or negotiate with the seller to cover them.

Key Takeaways

  • USDA loans allow you to borrow the full purchase price with zero down payment, which is their defining feature compared to other mortgage types.
  • You must still pay closing costs (typically 2 to 5 percent of the loan amount), though some lenders will include these in your loan balance.
  • The home must be in a USDA-designated rural area, and your household income must fall below the limit for your county.
  • USDA loans require a funding fee (usually 1 to 3.6 percent of the loan amount), which can be paid upfront or rolled into your monthly payments.
  • Your debt-to-income ratio — the percentage of your monthly income that goes to debt payments — must typically be 41 percent or lower.

Where USDA loans work and who can use them

USDA loans are only for homes in rural areas. The USDA maintains a map showing which counties and towns may have access to; you can search by address on their website to see if a specific property is may be able to access. Generally, this includes smaller towns and unincorporated areas, but excludes major cities and their when ready suburbs.

Income limits vary by county and household size. A family of four in one county might earn up to $90,000 per year and still may have access to, while the same family in a different county might have a limit of $75,000. You will need to check the specific limit for the county where you want to buy.

You also need a credit score of at least 580 to 640, depending on your lender — lower than many conventional loans require. If your score is below 580, some lenders will still work with you, but it becomes harder. Your debt-to-income ratio (the percentage of your monthly income that goes to debt payments) typically cannot exceed 41 percent, though some lenders go as high as 50 percent in certain cases.

The funding fee: a cost that replaces the down payment

Because USDA loans require no down payment, the government charges a funding fee to protect itself if you stop paying. This fee is usually between 1 and 3.6 percent of your total loan amount, depending on your loan type and whether you have served in the military.

You have two choices with the funding fee: pay it upfront at closing, or roll it into your loan and pay it over time as part of your monthly mortgage payment. Most people choose to roll it in because they do not have cash available at closing — which is often why they are using a USDA loan in the first place.

If you are a veteran or active-duty service member, you may be exempt from the funding fee entirely. Ask your lender whether you may have access to for this exemption before you lock in your loan terms.

Closing costs and what happens if you do not have cash

Closing costs are the fees charged by the lender, title company, and other parties involved in finalizing the loan. They typically include appraisal fees, title insurance, attorney fees, and recording fees. For a USDA loan, these usually total 2 to 5 percent of the purchase price.

Some USDA lenders will roll closing costs into your loan balance, meaning you do not pay them upfront. Others require you to pay them at closing. A third option is to negotiate with the seller to cover some or all of your closing costs — this is common in rural real estate markets where sellers are motivated to close the sale.

Before you start house hunting, ask your lender which closing costs they will roll into the loan and which you will need to cover. This tells you how much cash, if any, you need to bring to closing.

How USDA loans compare to other no-down-payment options

VA loans (for veterans and active-duty service members) also require no down payment and have no funding fee for may be able to access borrowers. If you served in the military, a VA loan may be a better choice than a USDA loan because you avoid the funding fee entirely. However, VA loans are not limited to rural areas, so they work anywhere in the country.

Conventional loans with down payment information are another path. Some nonprofits and state programs offer grants or forgivable loans to cover your down payment and closing costs. These vary widely by location and income, so you would need to research what is available in your area.

FHA loans require a minimum 3.5 percent down payment, so they are not truly zero-down. However, they accept lower credit scores and higher debt-to-income ratios than conventional loans, making them easier to get if your credit is not strong. For rural properties, USDA is usually the better choice because it requires no down payment at all.

The real cost of borrowing 100 percent of the purchase price

Borrowing the full purchase price sounds like a free pass, but it comes with a trade-off: you pay interest on a larger loan amount. If you put 20 percent down on a conventional loan, you borrow less money and pay less interest over the life of the loan. With a USDA loan, you borrow more, so your monthly payment is higher and you pay more interest overall.

You also start with zero equity in the home. Equity is the difference between what your home is worth and what you owe on it. If you buy a $200,000 home with no down payment and the market drops, you could owe more than the home is worth — a situation called being "underwater." This makes it harder to refinance or sell later.

That said, for someone who does not have savings for a down payment, a USDA loan is often the only realistic path to homeownership. The trade-off of higher payments is worth it if the alternative is renting indefinitely.

What to do before you talk to a lender

Start by checking whether the property you want to buy is in a USDA-may be able to access rural area. Go to the USDA Rural Development website and use their may be able to access map. Search by the exact address or zip code.

Next, find out the income limit for your household size in that county. The USDA website lists these by county. If your household income is above the limit, you do not may have access to, no matter how good your credit is.

Then pull your credit report from annualcreditreport.com (the only free source authorized by federal law) and check your score. If it is below 580, you may have trouble finding a lender willing to work with you, though some will.

Finally, add up all your monthly debt payments — car loans, student loans, credit cards, child support, anything you owe money on — and divide by your gross monthly income (before taxes). If this number is above 41 percent, you will need to pay down debt or increase your income before explore.

Frequently Asked Questions

Can I use a USDA loan to buy a house in the city?

Only if the city is in a USDA-designated rural area. Most major cities and their suburbs do not may have access to. Use the USDA's online map to check your specific address — it is the only reliable way to know.

What if I have some money saved but not enough for a down payment?

You can still use a USDA loan. The program does not require a down payment, but it does not forbid you from making one either. Some people put down 3 to 5 percent to reduce their loan amount and monthly payment, even though they do not have to.

Do I have to pay the funding fee upfront?

No. Most USDA borrowers roll the funding fee into their loan, which means it gets added to the amount you borrow and paid off over 30 years as part of your monthly mortgage payment. You can pay it upfront if you have the cash, but you do not have to.

Can I get a USDA loan if my credit score is below 580?

Some lenders will work with scores as low as 500 to 550, but it becomes harder and you may pay a higher interest rate. Most lenders prefer 620 or higher. If your score is very low, focus on paying down debt and disputing any errors on your credit report before you explore.

What happens if the home value drops after I buy it?

You will owe more than the home is worth, which makes refinancing or selling difficult. This is a real risk when you borrow 100 percent of the purchase price. However, if you plan to stay in the home for many years, the risk decreases as you pay down the loan and the market recovers.