USDA Loan Pros and Cons: USDA vs FHA vs Conventional vs VA
6 minute read
·
October 28, 2022

Share

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. 

See if you qualify for a zero-down USDA loan.

Pros and cons of a USDA loan

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.) 

USDA loan pros

  • No down payment required
  • Low mortgage insurance rates
  • Competitive interest rates
  • Lenient credit score minimum

USDA loan cons

  • Only 30-year, fixed-rate loans
  • Mortgage insurance is permanent
  • Income and geographical limits
  • Extra time required to close

Is USDA better than FHA?

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:

  • FHA loans: The Federal Housing Administration insures FHA loans to make qualifying easier for buyers with lower credit scores and higher debt-to-income ratios 
  • USDA loans: The U.S. Department of Agriculture insures USDA loans to help moderate-income buyers in rural areas buy their own homes

Which loan type is better? It depends on how the numbers stack up against your needs. Let’s take a look:

Loan featureUSDAFHA
Min. down payment0%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 priceNo
Min. credit score580-640 depending on lender580
Max. debt-to-income41% but higher for some applicants50%
Geographic restrictionsUSDA-defined rural areas onlyNone
Income limits115% of area median incomeNone
Loan limitsBased on income and max debt-to-income$420,680 in most counties
Upfront mortgage insurance1%1.75%
Ongoing mortgage insurance0.35%0.85%
Mortgage insurance cancelable?NoOnly with 10% down payment
Eligible propertiesSingle-family (1-unit) only1-4 unit homes
Eligible mortgage types30-year fixed only15- or 30-year fixed or adjustable
OccupancyOwner-occupied onlyOwner-occupied only

That’s a lot of data. Here’s what it means for most borrowers:

  • Who should use USDA loans? Home buyers in USDA-defined rural areas who earn no more than 115% of their area’s median income. They could benefit from the lower mortgage insurance fees and making no down payment
  • Who should use FHA loans? Home buyers who earn too much or live in areas that don’t sync with USDA financing — or home buyers whose credit scores and debt-to-income ratios fall outside USDA rules

In a nutshell, if you can get a USDA loan instead of an FHA loan, you probably should.

Check your USDA eligibility.

Is USDA better than a conventional loan?

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 featureUSDAConventional
Min. down payment0%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 priceNo
Min. credit score580-640 depending on lender620
Max. debt-to-income41% but higher for some applicants36% to 43%
Geographic restrictionsUSDA-defined rural areas onlyNone
Income limits115% of area median incomeNone
Loan limitsBased on income and max debt-to-income$647,200 in most counties
Upfront mortgage insurance1%None
Ongoing mortgage insurance0.35%Private mortgage insurance with less than 20% down; rates vary by borrower; generally higher than USDA
Mortgage insurance cancelable?NoYes
Eligible propertiesSingle-family (1-unit) only1-4 unit homes
Eligible mortgage types30-year fixed onlyVariety of terms with fixed or adjustable rates
OccupancyOwner-occupied onlyOwner-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. 

Get news and updates about USDA loans.

Is USDA better than a VA loan?

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 featureUSDAVA
Military service required?NoYes
Min. down payment0%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 priceNo
Min. credit score580-640Lender specific
Max. debt-to-income41% but higher for some applicants41% but higher for some applicants
Geographic restrictionsUSDA-defined rural areas onlyNone
Income limits115% of area median incomeNone
Loan limitsBased on income and max debt-to-incomeNone
Upfront mortgage insurance1%2.3% for first-time VA borrowers
Ongoing mortgage insurance0.35%None
Mortgage insurance cancelable?NoN/A
Eligible propertiesSingle-family (1-unit) only1-4 unit homes
Eligible mortgage types30-year fixed only15- or 30-year fixed or adjustable
OccupancyOwner-occupied onlyOwner-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:

  • If you stayed in the home long enough, you could save thousands of dollars with a VA loan. Every month with no mortgage insurance would add even more to your savings
  • If you plan to sell or refinance within a few years, the USDA’s lower upfront fee could benefit you more. You might not keep the loan long enough to justify the VA’s larger upfront fee

Those who qualify for USDA should probably use USDA

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.
Share
Share on LinkedIn
Email this Article
Print this Article