USDA Farm Loans Vs. USDA Home Loans: What’s the Difference?
USDA loans are a lifesaver for many eligible Americans. These include lower-earning homeowners willing to live in designated rural areas but who do not have the money for a big down payment. The USDA can also help farmers eager to purchase land, livestock, or equipment, or who want to make farm improvements. Fortunately, there are loan options for both types of borrowers, including USDA home loans and USDA farm loans.
What’s the difference between these two? Is it possible to qualify for both? And how can you choose the right USDA loan for your needs? This article supplies helpful answers as well as insights from experts.
A USDA home loan is a fixed-rate mortgage loan secured by the U.S. Department of Agriculture (USDA). It’s designed for low- and moderate-income borrowers, especially first-time buyers, who want to purchase or refinance homes in designated rural and suburban areas approved by the USDA. The USDA’s Rural Development division manages these loans, which are called Section 502 loans because they are authorized under Section 502 of the Housing Act of 1949, a law that gave the USDA the authority to offer home loans and loan guarantees.
The USDA loan program provides several perks to eligible borrowers. One of its standout benefits is the ability to secure a mortgage with no down payment, a rare feature in today’s mortgage market. As one of the few remaining loan programs in the country offering true zero-down financing, homeownership is far more accessible for buyers who may otherwise struggle to save a sizable lump sum upfront. Additionally, thanks to the USDA’s guarantee on a portion of each loan, lenders can offer competitive rates and more flexible qualification standards. While specific credit requirements vary by lender, USDA loans generally accommodate borrowers with moderate credit scores, opening the door to affordable financing for a broader range of applicants.
Additionally, USDA home loans have reduced mortgage insurance costs and attractive interest rates. The program’s upfront guarantee fee is just 1% of the loan amount, which can be rolled into your mortgage, while the annual fee is only 0.35%. By comparison, a typical FHA loan, which requires at least 3.5% down, carries much higher fees. This combination of lower insurance costs and consistently competitive interest rates means USDA loan holders often enjoy more affordable monthly payments than those using other loan types, making it a valuable option for qualified rural buyers.
There are two main types of USDA home loans: a direct loan and a guaranteed loan.
There’s a third kind of USDA home loan: a USDA 504 loan, intended to provide funds to very-low-income borrowers residing in rural areas to improve and repair their properties so they are safer and more comfortable. Two kinds of financing are available: low-interest loans up to $40,000 that can be paid back over 20 years and grants up to $10,000 for seniors (62 and older) who can’t afford to repay a loan.
The USDA also offers farm operating loans to qualified applicants. These farm loans are run by the USDA’s Farm Service Agency (FSA). They are ideal for agricultural needs, including purchasing farmland, equipment, or livestock, making farm improvements, covering operating costs, or refinancing existing agrarian debt.
“USDA farm loans are targeted toward beginning farmers and ranchers, minority and women farmers, and family farms with loans made to limited resource operations,” says Jacob Naig, a real estate agent and investor. “While the primary function of a USDA home loan is to put a roof over your head, farm loans help keep agriculture alive and sustainable.”
The FSA offers two main types of financing: guaranteed loans and direct loans.
There are also different farm loan options to choose from:
| Feature | USDA Home Loan | USDA Farm Loan |
|---|---|---|
| Purpose | Buy/refinance a rural home | Buy/improve farmland and farm buildings |
| Agency | USDA Rural Development | USDA Farm Service Agency (FSA) |
| Includes Home? | Yes (primary focus) | Yes, if tied to the farm |
| Down Payment | $0 | Depends on the loan type |
| Credit Requirements | Moderate | More flexible (esp. for new farmers) |
| Who It's For? | Low/moderate-income rural homebuyers | Farmers, ranchers, and ag-based businesses |
The truth is, many family-operated and smaller farms have residences located on the same land as their farming operation. Thankfully, in most cases, you are allowed to live on a property bought with a USDA farm loan, so long as the primary purpose of the loan is for agricultural use and the borrower actively operates the farmland. In other words, the housing structure itself must not be the sole purpose of the financing.
Additionally, the USDA often mandates that any housing on the property be relatively modest and suitable for rural settings. Suppose you want to apply for a farm ownership loan and intend to live on the land. In that case, you’ll need to indicate this plan in your application, demonstrating how both your farming operations and primary residence will coexist on the property.
“This flexibility makes sense for owner-operators, especially in rural areas where work and life often share the same acreage,” explains Dennis Shirshikov, a professor of finance and economics at City University of New York/Queens College.| Borrower Situation | Best USDA Loan Type | Key Features |
|---|---|---|
| I want to purchase a home in a rural area and live there full time. | USDA Guaranteed Home Loan | No down payment, competitive rates for moderate-income buyers, offered by private lenders |
| I have a very low income and want to purchase or build a modest residence in a rural area. | USDA Direct Home Loan | Funded by USDA, lower rates, longer terms, and possible payment assistance; income limits apply |
| I want to repair or improve my rural home, but I have limited funds. | USDA 504 Repair Loan & Grant | Low-interest loans up to $40k and grants up to $10k for seniors for home repairs and safety upgrades |
| I want to buy land with a home and start a small farm or raise animals. | USDA Farm Ownership Loan (Direct or Guaranteed) | Buy farmland, build or repair farm buildings, refinance farm debt; direct or private lender options |
| I already own a farm and require seeds, equipment, or livestock funds. | USDA Farm Operating Loan (Direct or Guaranteed) | Covers everyday farming costs such as inputs, equipment, fuel, and family living expenses |
| I have a small or specialty farm and need a smaller financing amount. | USDA Microloan (Direct) | Up to $50,000, more straightforward application, ideal for beginner or niche farms like organic or farmers' markets |
| I’ve suffered a natural disaster affecting my farm. | USDA Emergency Loan (Direct) | Helps cover losses or damages from floods, storms, droughts, or other disasters |
| I need to make eco-friendly improvements on my farm. | USDA Conservation Loan (Guaranteed) | Financing for soil, water, or environmental conservation projects via private lenders |
Fortunately, it’s possible to meet both USDA home loan and USDA farm loan requirements in order to be eligible for two separate loans.
“I’ve helped several clients do this,” says personal finance expert Andrew Lokenauth. “But they are completely separate programs with different qualification requirements. The home loan is for your primary residence, while the farm loan is for agricultural business purposes.”
Naig says he’s seen young farmers finance their homes via the USDA loan program and obtain separate operating loans to get their farm businesses going. “But the underwriting teams and paper trails are as different as possible,” he adds.
Note that it’s impossible to combine both types of loans into one product or use the funds from one kind of loan for another type of usage, such as devoting home dollars to farm improvements.
USDA loans are helpful both for borrowers with modest means seeking a home and farmers who need extra funds to purchase and run their agricultural properties.
“When banks balk, USDA loans shine for low-income applicants, new farmers, and those who want to live and work in the country,” Naig adds. “The strength of this financing is that it can create opportunities, not just affordability.”
To learn more, contact a loan specialist or visit the USDA website to find eligible locations and better determine eligibility.
Several factors can disqualify a home from USDA eligibility. These include not being located in an eligible rural area, being used for income generation (such as rental homes), the condition of the home not meeting USDA appraisal standards, or having a borrower exceed income limits or have credit issues.
A USDA farm loan and a USDA mortgage loan are two different types of financing used to purchase property, but they serve different ends. A farm loan is intended to assist farmers in buying land, livestock, and equipment or covering operating expenses for an agricultural business. It is typically provided by specialized lenders like the USDA itself or farm credit institutions. A mortgage loan is used to purchase or refinance a primary residence. With a USDA home loan, the residence must be in an approved rural or suburban area, but the property cannot be a farm.
USDA financing is only available to qualified borrowers in eligible suburban and rural areas. Applicants must not exceed income limits or use the property for rental, investment, or income purposes. USDA home loans charge an upfront guarantee fee as well as an annual fee. The appraisal process can be stricter than for other types of home loans and may take longer to process. Lastly, fewer lenders offer USDA loans.
