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USDA loans don’t require a down payment. That benefit tends to dominate the pros column when buyers compare USDA loan pros and cons.
But not everyone — and not every home — is eligible for USDA financing. And, some home buyers who could use no-money-down USDA loans can save more with a conventional mortgage.
So let’s dig deeper than the down payment to see how USDA loan pros and cons match up with your unique needs.
The UDSA operates two loan programs. In this post, we’re talking about the pros and cons of USDA Guaranteed Loans. The USDA Guaranteed program comes from private lenders, like other types of mortgages. (The other type, the USDA Direct Loan, comes from the USDA itself.)
You could think of USDA loans and FHA loans as cousins. The U.S. government backs both, making them more attractive to lenders and borrowers.
But these loans are also different because the specific federal agencies that insure these loans have different goals:
Which loan type is better? It depends on how the numbers stack up against your needs. Let’s take a look:
Loan feature | USDA | FHA |
Min. down payment | 0% | 3.5% |
Est upfront cost: $300k loan w/$5k closing costs | $5,000 | $15,500 |
Roll closing costs into loan? | Yes, when appraised value > purchase price | No |
Min. credit score | 580-640 depending on lender | 580 |
Max. debt-to-income | 41% but higher for some applicants | 50% |
Geographic restrictions | USDA-defined rural areas only | None |
Income limits | 115% of area median income | None |
Loan limits | Based on income and max debt-to-income | $420,680 in most counties |
Upfront mortgage insurance | 1% | 1.75% |
Ongoing mortgage insurance | 0.35% | 0.85% |
Mortgage insurance cancelable? | No | Only with 10% down payment |
Eligible properties | Single-family (1-unit) only | 1-4 unit homes |
Eligible mortgage types | 30-year fixed only | 15- or 30-year fixed or adjustable |
Occupancy | Owner-occupied only | Owner-occupied only |
That’s a lot of data. Here’s what it means for most borrowers:
In a nutshell, if you can get a USDA loan instead of an FHA loan, you probably should.
Check your USDA eligibility.Unlike USDA and FHA loans, conventional loans do not feature federal mortgage insurance. As a result, home buyers must rely more on their own credit history — and often private mortgage insurance, or PMI — to qualify.
For borrowers who have shaky credit scores and high monthly debt burdens, conventional loans can be too costly — or these borrowers may not qualify for a conventional loan at all.
However, well qualified borrowers can save money with conventional financing because they won’t need government insurance fees to get a competitive rate.
Here’s a quick rundown of USDA and conventional loans side by side:
Loan feature | USDA | Conventional |
Min. down payment | 0% | 3% to 5% |
Est upfront cost: Min down payment, $300k loan w/$5k closing costs | $5,000 | $14,000 |
Roll closing costs into loan? | Yes, when appraised value > purchase price | No |
Min. credit score | 580-640 depending on lender | 620 |
Max. debt-to-income | 41% but higher for some applicants | 36% to 43% |
Geographic restrictions | USDA-defined rural areas only | None |
Income limits | 115% of area median income | None |
Loan limits | Based on income and max debt-to-income | $647,200 in most counties |
Upfront mortgage insurance | 1% | None |
Ongoing mortgage insurance | 0.35% | Private mortgage insurance with less than 20% down; rates vary by borrower; generally higher than USDA |
Mortgage insurance cancelable? | No | Yes |
Eligible properties | Single-family (1-unit) only | 1-4 unit homes |
Eligible mortgage types | 30-year fixed only | Variety of terms with fixed or adjustable rates |
Occupancy | Owner-occupied only | Owner-occupied, vacation homes, second homes |
What’s the verdict? Once again, buyers who meet the USDA’s income and geographical limits can save money with this loan type. They could also buy a home sooner since there’d be no need to save up a down payment.
But conventional loans can offer more flexibility, and more borrowing power, for buyers who have excellent credit and low monthly debts. This is especially true for buyers who already have a big down payment saved up.
Like USDA loans, VA loans require no down payment. Also like USDA loans, not everyone can apply for a VA loan. Only U.S. military service members and honorably discharged veterans (and some surviving spouses of veterans) can qualify for VA financing.
Here’s how the VA loan program compares to USDA financing:
Loan feature | USDA | VA |
Military service required? | No | Yes |
Min. down payment | 0% | 0% |
Est upfront cost: Min down payment, $300k loan w/$5k closing costs | $5,000 | $5,000 |
Roll closing costs into loan? | Yes, when appraised value > purchase price | No |
Min. credit score | 580-640 | Lender specific |
Max. debt-to-income | 41% but higher for some applicants | 41% but higher for some applicants |
Geographic restrictions | USDA-defined rural areas only | None |
Income limits | 115% of area median income | None |
Loan limits | Based on income and max debt-to-income | None |
Upfront mortgage insurance | 1% | 2.3% for first-time VA borrowers |
Ongoing mortgage insurance | 0.35% | None |
Mortgage insurance cancelable? | No | N/A |
Eligible properties | Single-family (1-unit) only | 1-4 unit homes |
Eligible mortgage types | 30-year fixed only | 15- or 30-year fixed or adjustable |
Occupancy | Owner-occupied only | Owner-occupied only |
As you can see in the chart, VA and USDA loans have a lot in common. A borrower who’s eligible for both loan types would have a tough decision to make.
Here’s a key difference: The VA loan has a bigger upfront mortgage insurance fee, but it charges no monthly or annual mortgage insurance fee like USDA. So:
For most borrowers, it’s simple: Meeting the eligibility requirements of a USDA loan means they should probably get a USDA loan.
There are exceptions. People with pristine credit, low monthly debts, and a 20% down payment in savings could get a better deal with a conventional loan.
But few home buyers fit this mold, and it’s OK to get some home buying help to level the playing field. That’s why programs like the USDA Guaranteed Loan exist.
See if you qualify for a zero-down USDA loan.Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.