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Mortgage loans from the United States Department of Agriculture (USDA) and Federal Housing Administration (FHA) are generally easier to qualify for than a conventional mortgage. This makes them good options for first-time homebuyers and low- to moderate-income borrowers.
While both of these loans are backed by government agencies, there are several key differences between the two that you’ll need to consider before applying for one. For instance, USDA loans require you to live in a rural setting and meet your area’s income limit.
Here’s a closer look at each loan program so you can decide which one best fits your needs:
USDA vs. FHA eligibility
The USDA and FHA both offer home loans for single-family residences.
For an FHA loan, you’ll apply for a 203(b) basic home mortgage loan to purchase your primary residence.
However, there are two USDA home loan programs to choose from and the eligibility standards are slightly different:
- USDA Guaranteed Loan: For low- to moderate-income households that a private lender issues but the USDA backs. You won’t have a borrowing limit or property restrictions for this loan.
- USDA Direct Loan: For low- and very-low-income borrowers that need additional underwriting. The USDA funds the loan and it has stricter income and property qualifications. Also, the borrowing limit is $285,000 in most counties.
Here are the basic requirements you’ll need to meet for each loan:
|USDA loans||FHA loans|
|Min. down payment||0%||
|Min. credit score||640||500|
|Income limits||Up to 115% of median household income||None|
|Debt-to-income ratio (DTI)||
|Loan limits||$356,362 for single-family residences in most areas|
|Location requirements||USDA-eligible rural areas only||None|
|Qualifying property types||Single-family primary residences only||Primary residences between 1 and 4 units|
|Mortgage repayment terms||30-year fixed||30-year fixed, 15-year fixed, and adjustable-rate|
|Upfront fee||1% guarantee fee||1.75% upfront mortgage insurance premium|
|Annual fee||0.35% annual fee||Up to 0.85% annual mortgage insurance premium|
Also See: Conventional Loan Requirements
USDA home loans have stricter income limits than FHA loans and also require you to live in an eligible rural area. Your home address and annual household income determine your borrower eligibility for USDA loans.
FHA borrower requirements, on the other hand, are more lenient as you can have a lower credit score. Multi-unit properties are also eligible. However, you’ll need to make a down payment with an FHA loan.
USDA vs. FHA vs. conventional
Many homebuyers will use a USDA, FHA, or conventional mortgage to purchase their home. Here’s a closer look at how these three loan types differ.
These loans are only available to rural homebuyers with low or moderate incomes. The income limits vary by region but are relatively strict. USDA loans don’t require a down payment but you’ll need a minimum credit score of 640 and have to pay an upfront 1% guarantee fee plus an annual fee equal to 0.35% of your loan amount.
Of the government mortgage programs, you may have the easiest time qualifying for an FHA loan. You’ll only need a 3.5% down payment when your credit score is at least 580.
With that said, you’ll most likely pay mortgage insurance for the life of the loan unless you can put down at least 10%. Doing this allows you to waive your remaining payments after 11 years.
Conventional mortgages have the strictest credit requirements but they also offer competitive rates and can end up being cheaper in the long run. For example, you can avoid private mortgage insurance with a minimum 20% down payment.
Credible doesn’t offer FHA or USDA loans, but we can help you find a great rate on a conventional loan. Simply enter some basic financial information, and you’ll see several prequalified rates in minutes. After that, you can explore your loan options and find one that best fits your budget.
USDA pros and cons
USDA loans offer several advantages for borrowers, but you’ll need to consider some of the drawbacks as well.
Here are some of the best reasons to consider a USDA loan:
- No minimum down payment: Conventional loans and FHA loans both demand some form of down payment, but USDA loans have no such requirement.
- May not need cash reserves: Lenders may not require cash reserves to secure financing. However, including your qualifying balances might make it easier to qualify.
- No set maximum purchase price: USDA loans don’t have a borrowing limit. Instead, your maximum loan amount depends on your repayment ability.
- Lower mortgage insurance fees: Your upfront USDA guarantee fee is 1% of the loan amount and the annual fee is 0.35%. Both rates are lower than the FHA mortgage insurance premiums.
- Seller can pay closing costs: The seller can contribute up to 6% of the sales prices. You can also receive unlimited gift funds to reduce your loan amount.
These are the main disadvantages of this loan program:
- Good credit required: You’ll need a minimum 640 credit score to be eligible for this loan, similar to conventional lenders. FHA lenders may only require a score of 580 or less.
- Geographic restrictions: You must live in a rural area to qualify for USDA financing. Thankfully, the definition is flexible and many suburban and bedroom communities can be eligible if the population is below a certain amount.
- Maximum income limits: For a USDA Guaranteed Loan, your household income cannot exceed 115% of your county’s median household income (MHI). Households with an income 80% below the MHI will need to apply for a USDA Direct Loan. Direct Loans can have stricter property and application requirements but, like Guaranteed Loans, they don’t require a down payment.
- Lifetime guarantee fee: All USDA loans require an upfront and annual guarantee fee for the life of the loan. Unlike FHA and conventional loans, making a qualifying down payment won’t have any effect on whether or not you’ll pay mortgage insurance.
- Single-family homes only: Single-family homes are the only eligible property type. This includes townhouses and condos, as long as you use the unit for your primary residence. Investment properties are ineligible.
FHA pros and cons
FHA loans are a good option, especially if you have low credit or a lot of debt. But they come with their own set of drawbacks too.
Some of the best reasons to apply for an FHA home loan include:
- Lenient credit requirements: You can generally qualify for maximum FHA financing with a credit score of 580 versus a 640 score for a USDA loan. You might also be eligible with a credit score between 500 and 579 if you can make a 10% down payment.
- Higher debt-to-income ratios: Your back-end DTI — that is, your total monthly debt obligations — can be as high as 45% for FHA loans, but only 41% for USDA loans.
- Potentially lower interest rates: FHA interest rates can be lower than rates for USDA loans because you have the option to choose shorter repayment terms, including a 15-year fixed interest rate. The USDA only offers 30-year fixed loans, which naturally have higher rates.
- Multi-family units can qualify: Properties with up to four units can qualify for financing with an FHA loan when one unit is your primary residence. For example, purchasing a duplex with an FHA loan is allowed as long as you live in one half of the property. Like USDA loans, however, second homes and investment properties are ineligible.
- Higher down payment requirements: Depending on your credit score, you’ll need to make a 3.5% or 10% down payment. USDA loans require no down payment.
- Higher mortgage insurance premiums: Your upfront and annual mortgage insurance premiums are higher than the USDA guarantee fee and annual fee.
- Difficult to cancel mortgage insurance: You’ll pay an annual mortgage insurance premium for the life of the loan unless your down payment is at least 10% — in which case, you’ll only pay mortgage insurance for the first 11 years.
- Mortgage limits: The maximum loan amount in 2021 is $356,362 for most counties. You can qualify for a higher limit if you live in a high-cost area.
Keep Reading: FHA vs. Conventional Loans: Which One’s Right for You?