Ask the expert: What is a USDA loan?

Many people are currently hoping to live the American Dream of becoming a homeowner, and according to Nerd Wallet, the U.S. Department of Agriculture’s special home loan might just be the ticket they are seeking.

While this department might seem an unlikely place to find a loan for a new house, the point of the program is to help growth in the more rural parts of the country where incomes are typically lower than their urban counterparts. To spur that growth, USDA loans come with excellent benefits.

One of the most significant incentives for going after a USDA loan is that they require no money down at all to secure the loan and it guarantees lower interest rates. This will help young buyers or families that otherwise struggle to save up for a down payment on a traditional loan. Nearly 140,000 families were able to take advantage of this in 2014 alone.

The loans work in a couple of ways: loan guarantees and direct loans. With a loan guarantee, a buyer will use a local lender affiliated with the program. Then, the government will act as the guarantor on that loan so that the buyer will have access to better terms, much like how it would work using a co-signer. A direct loan is one issued straight from the USDA, and these are found among the low- and very low-income applicants to the program. Subsidies with direct loans can bring the interest rate down to as little as one percent.

The supply of houses that are eligible for the loan are located in rural areas. There are, however, some options in more suburban locations that could strike a right balance for daily commuters. Applicants must also fall within some specific income, debt, and credit score thresholds and these vary from location to location. Typically, the monthly payment on the home cannot exceed 29 percent and credit scores should be at or above 660. USDA mortgage lenders will also be looking for a good payment history to other creditors, and applicants with a score under 580 will have to undergo a more thorough review.