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USDA Loan Pros and Cons: Decide if This 0% Down Loan Works for You

Key Learnings
  • USDA loans are great for homeowners in a qualifying geographic area and have a low-to-moderate income
  • USDA loans have several benefits such as no required down payment, lower interest rates and adjustable credit requirements
  • Depending on the borrower's needs, a USDA loan may not be the right fit
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USDA loans are a useful way of making homeownership possible in rural areas when you don’t have money saved for a down payment. That’s right; you can own a home for $0 down.

You may be thinking, “Well, I don’t live in a rural area.” The good news is the USDA’s definition of “rural” is more flexible than you might think. In addition to houses in the country that you would traditionally consider rural, homes in towns, villages and even some suburbs could qualify for a USDA loan.

Before you can decide if this home loan program is the right fit for you, you need to understand the pros and cons of the USDA loan. There are lots of benefits of USDA loans, but no loan program is a perfect fit for all buyers.

USDA Loan Pros

There are several important advantages of USDA loans to consider. Let’s break them down for you.

No Down Payment

No down payment? No problem! USDA loans give many buyers the chance to own a home with $0 down. The federal government insures USDA loans, which means there is less risk for lenders, which means lenders are willing and able to finance more of the purchase, which is 100% of the purchase in most cases.

Flexible Credit Requirements

If you’re nervous about qualifying for a home loan because of a few negative marks on your credit report, USDA loans might be a good option for you. Again, lenders don’t have to worry as much about you repaying your loan when the federal government insures the mortgage, so they’re able to relax their credit requirements for USDA borrowers.

It’s important to remember, however, that USDA loans are intended to help moderate-to-low income borrowers get into homes, so some lenders may require higher credit scores to help mitigate some of the risk.

No Cash Reserves Required

Other loan types, like conventional loans and FHA loans, might require cash reserves for borrowers with credit issues or risky debt-to-income ratios. This means you would need to show that you have enough cash available after purchasing the property to cover a month or more of expenses. But with USDA loans, cash reserves aren't required.

No Prepayment Penalty

Some loan types charge you a fee if you decide to pay off your loan early. If you pay off your loan early, the lender misses out on interest income they were counting on, so this fee helps them recoup some of that income. But with USDA loans, there’s no penalty.

Lower Interest Rates

Loans with low down payment requirements such as the conventional loan may carry a higher interest rate if the borrower has a lower credit score. But, again, with the government backing your loan, lenders can keep your USDA interest rates low since they assume less risk. Lower interest rates mean lower monthly payments and less money spent on interest over the term of the loan.

Closing Costs Can Be Rolled Into the Loan

Many buyers are surprised to find that closing costs usually end up being around 3-5% of the home’s purchase price. On a $250,000 home, that would be $7,500-$12,500, which is a lot of cash to just have sitting around. But with a USDA loan, you can add this cost to your loan so you don’t have to pay it out of pocket up front. Under certain market conditions, you can sometimes get the seller to pay your closing costs to take this expense off your plate completely.

Note: When it comes to rolling closing costs into the loan, some lenders may only offer this if the appraisal were to come in above the purchase price.

USDA Loan Cons

Of course, we can’t just ignore the potential downsides when looking at the pros and cons of USDA loans. As a homebuyer, it’s important to get a well-rounded explanation of the mortgage options available to you. So, as promised, here are some of the possible problems with USDA loans.

Geographic Restrictions

If you want to buy a home in the heart of a major city, USDA loans aren’t for you. Urban properties fall outside of the qualifying geographic areas. However, many towns fall within the USDA property eligibility map, especially if you’re looking at towns of fewer than 35,000 people.

Income Limits

One goal of the USDA home loan program is to help low-to-moderate-income buyers find homes. For this reason, there is an income limit, meaning you can actually make too much money to qualify for a USDA loan. For homes with 1-4 members, income is limited to $110,650. For homes with 5-8 members, the income limit is $146,050.

USDA Upfront Guarantee Fee

USDA loans require an upfront guarantee fee for processing the loan. This fee equals 1% of the loan amount. Rather than paying this fee at closing, you can roll the cost into the loan and pay it off in installments through your monthly mortgage payments.

USDA Annual Guarantee Fees

In addition to your upfront guarantee fee, you'll need to pay recurring USDA program fees. As of 2021, these fees equal .35% of the loan amount. Rather than paying a lump sum each year, you can choose to pay this amount in monthly installments with your mortgage payments.

Primary Residences Only

The good news is that you can use USDA loans for multiple property types, including single-family homes, newly constructed homes, condos and manufactured homes, as long as you make the property your primary residence. The not-so-good news is that you can’t use a USDA loan for:

  • Vacation homes
  • Multi-family homes (like duplexes, triplexes, or apartments, even if one of the units is your primary residence)
  • Investment properties
  • Non-residential real estate

Note: Paddio currently does not offer financing for manufactured homes.

Longer Underwriting Times

There are lots of details lenders need to check when you apply for a USDA loan, so it can potentially take longer to underwrite the loan than if you were to use a conventional home loan. If you’re in a rush to close on a home, this may not be the option for you.

USDA Loan Frequently Asked Questions

You’ve got questions, we’ve got answers!

Is a USDA Loan Worth It?

For the right buyer, absolutely! If you’re looking for a home in a qualifying geographic area, have low-to-moderate income and want a 0% down payment option, a USDA loan could be worth it.

What is the Downside to USDA Loans?

The potential problems with USDA loans are:

  • Geographic restrictions on where you can buy
  • Limits on the amount of income you can earn to qualify
  • Restrictions on the type of property you can buy
  • Program-specific fees
  • Longer loan processing times (compared to conventional loan)

Do USDA Loan Require a Down Payment?

Nope! Some buyers with income on the high side of the acceptable income limit might be required to put down a comparatively small down payment, but most buyers won’t need to.

Find a USDA Lender

Now that you understand the advantages and disadvantages of the USDA loan, you’re one step closer to getting the financing needed to buy a home. Ready to take another step? Get matched with the right lender for you.

Written by:
Tyler Oswald
Loan Officer Development NMLS #2071128

Tyler brings her expertise of FHA, Conventional and USDA home loans to the team rounded out by a bachelor’s degree in marketing with an emphasis on professional sales.

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