Choosing between a USDA and VA loan can be a challenging decision. Depending on your specific circumstances and qualifications, one loan type may be more favorable than the other.
USDA loans, offered by the United States Department of Agriculture, are ideal for low to moderate-income buyers looking to purchase in rural or suburban areas.
On the other hand, VA loans are backed by the Department of Veterans Affairs and available to Veterans, active duty service members and some surviving spouses.
When deciding between a VA loan or a USDA loan, it’s important to consider both the similarities and differences of each mortgage type.
If you’re an eligible homebuyer looking to purchase a home with no down payment VA loans and USDA loans are two excellent options to consider. Both loan programs are backed by government agencies and offer unique benefits. However VA and USDA loans also have key differences when it comes to eligibility requirements, loan limits, interest rates, fees, and more.
In this comprehensive guide, we’ll compare VA loans versus USDA loans to help you determine which mortgage best fits your needs and qualifications as a homebuyer.
VA Loan Overview
First, let’s look at some background on VA loans. VA loans are mortgage loans guaranteed by the U.S Department of Veterans Affairs. They allow eligible borrowers to purchase a home without any down payment or private mortgage insurance (PMI).
VA loans are only available to military members and Veterans You must have served a minimum of 90 consecutive days on active duty during wartime or 181+ days during peacetime Veterans discharged under conditions other than dishonorable are also typically eligible.
In addition to purchase loans, VA loans can be used to refinance an existing mortgage into a lower interest rate or cash-out refinance
USDA Loan Overview
USDA loans are backed by the United States Department of Agriculture. Originally designed to help low-to-moderate income buyers in rural areas achieve homeownership, these zero-down payment loans have expanded in availability.
USDA loans are open to the general public, not just military members. They help creditworthy, low-to-moderate income buyers in eligible rural and suburban locations buy a home. Income limits based on family size and location apply.
Key Similarities
VA and USDA loans share some important common benefits:
- Zero down payment required – Both loan programs offer 100% financing
- Lenient credit requirements – No minimum credit score is set
- No mortgage insurance – Avoid monthly PMI payments
- Competitive interest rates – Often lower than conventional loans
- Available for purchases – Can’t be used for refinancing
Key Differences
While VA and USDA loans have similarities, they differ in a few key areas:
| Factor | VA Loan | USDA Loan |
|---|---|---|
| Borrower Eligibility | Veterans, active duty military, National Guard/Reserves | General Public |
| Income Limits | None | Moderate income limits apply |
| Loan Limits | None for full entitlement | Varies based on income and location |
| Interest Rates | Lower, around 2.25% | Slightly higher, around 2.5% |
| Loan Fees | VA funding fee | Upfront guarantee fee + annual fee |
| Credit Requirements | 620 minimum score | 640 minimum score |
| Property Location | No restrictions | Rural and suburban areas only |
Now let’s take a deeper look at how VA loans and USDA loans compare across these key factors.
Eligibility Requirements
VA loan eligibility is reserved for military members and Veterans only. You must have served a minimum period of active duty service to qualify.
USDA loans are open to all U.S. citizens and permanent residents. There are no military service requirements. As long as you meet income limits for your area and property location requirements, you can apply for a USDA loan.
This makes USDA loans accessible to a much wider pool of borrowers. VA loans cater specifically to service members, Veterans and their families.
Income Limits
One of the biggest differences between VA and USDA loans are the income requirements. VA loans do not have any income limits. Regardless of your income level, if you served in the military then you can qualify for a VA loan.
USDA loans do have maximum income thresholds based on your location. These limits ensure USDA loans go to low-to-moderate income buyers in rural areas. Household size is also factored in.
For example, the income limit for a family of 4 in Dallas, TX is $98,900. A single person can earn up to $69,300. You must fall under the income cap for your county and household size to qualify for a USDA loan.
VA loans give high-income Veterans and military members greater flexibility, while USDA loans focus on lower-income borrowers.
Loan Limits
Similar to income, VA loans do not have any loan limits for borrowers with full VA entitlement. This allows eligible buyers to purchase a more expensive, luxury home using their VA benefits.
USDA loans have loan limits that vary based on your income, assets, debts, and the cost of real estate in your area. The loan amount you qualify for is directly tied to your financial profile. USDA loans cater to modest, starter homes for first-time buyers.
Interest Rates
Across 2022 and 2023, average VA loan interest rates were around 0.25% lower than USDA loans. For example, in January 2023, the average VA rate was 2.25% while USDA averaged 2.5%.
Lower income buyers may qualify for an even lower USDA rate around 1%, however. So for some borrowers, USDA offers the most affordable option.
VA rates are very competitive overall. Having a strong credit profile can help you secure the lowest available rate.
Loan Fees
VA loans charge a one-time VA funding fee, while USDA loans have an upfront guarantee fee and ongoing annual fee.
For a $200k loan amount, here is how the fees compare:
- VA loan – 2.3% funding fee = $4,600 at closing
- USDA loan – 1% guarantee fee = $2,000 at closing + $700 annual fee
While the upfront USDA fee is lower, over 4+ years the annual fee makes it ultimately more expensive than the VA funding fee. Some Veterans are exempt from the VA fee, however.
Credit Requirements
Both loan programs are flexible for borrowers with less-than-perfect credit. VA lenders typically look for a 620 minimum credit score. USDA lenders prefer a slightly higher 640 score.
So VA loans provide more leeway for Veterans with lower credit scores. But both programs offer credit options superior to conventional mortgages.
Location Requirements
The biggest constraint of USDA loans is the strict property location requirements. Homes must be in eligible rural and suburban areas. VA loans can be used to buy homes anywhere in the U.S. without location restrictions.
This gives Veterans complete flexibility. USDA borrowers must ensure the home is in a qualified rural zone.
Which Is Better for You?
Determining whether a VA loan or USDA loan is the better choice depends on your individual situation:
-
VA loan – Best if you want to avoid any income or loan limits, have lower credit scores, or don’t want location constraints.
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USDA loan – Best if you meet income requirements, are purchasing in a suburban/rural area, or want the lowest upfront costs.
Differences Between USDA and VA Loans
Choosing between a USDA or VA loan can be a challenging decision. While some VA loan requirements are similar to USDA, the two have key differences.
Below is a table outlining the essential factors when comparing USDA loans to VA loans.
| Comparison Factor | USDA Loan | VA Loan |
|---|---|---|
| Eligibility | Available to the general public and property must be in an eligible rural area | Only available to active-duty service members, Veterans, members of the National Guard or Reserves and surviving spouses |
| Credit Score Minimum | None set, but typically around 640 | None set, but typically around 620 |
| Income Limit | 115% of the area’s median household income | None |
| Interest Rates | Typically higher than VA but may be lower for low-income applicants | Typically lower than USDA and not based on income |
| Loan Limit | Depends on the borrower’s income, location and size of household | None for Veterans with full entitlement |
| Property Requirements | Must serve as primary residence, be a single-family home and adhere to USDA MPRs | Must serve as primary residence, adhere to VA MPRs and buyer must move in within 60 days of closing |
| Program Fees | Upfront guarantee fee and annual fee | VA funding fee |
| Closing Costs | Typically 2 to 6% of the total loan amount and up to 6% seller concession | Typically 3 to 6% of the total loan amount and up to 4% seller concessions |
USDA loans and VA loans have very different eligibility requirements. USDA loans are designed for people with moderate to low incomes who want to buy homes in rural or suburban areas. To qualify, you must meet certain income levels, have a good credit score and the home must be in an eligible area.
VA loans are for Veterans, active duty service members, members of the National Guard or Reserves and surviving spouses. To qualify, you must meet specific military service requirements. Unlike USDA loans, your income or property location doesn’t affect your VA loan eligibility.
If you qualify for both a USDA and VA loan, compare your loan rates to see which is more affordable.
USDA and VA loans both offer credit score flexibility and do not have a set minimum, making homeownership more accessible. For a USDA loan, applicants typically should aim for a credit score of at least 640. This threshold allows lenders to streamline the application process.
VA lenders consider the entire financial profile of the applicant. This may include credit history, employment history and debt-to-income (DTI) ratio. Typically, VA lenders look for a credit score of 620 or higher.
While both loan types are accommodating, the VA loans offer more credit flexibility to prospective borrowers.
USDA loans and VA loans approach income limits very differently. For a USDA loan, specific income limits are set by the USDA. These limits depend on the property’s location and size of the household. Applicants must fall below the set income thresholds to qualify, ensuring these loans stay accessible to low to moderate-income homebuyers.
In contrast, VA loans dont have any income limits. Veterans and active-duty service members can earn any amount and still be eligible for a VA loan. VA loan eligibility focuses primarily on the borrowers military service history, not their income.
When considering income limits, VA loans are the preferred choice for buyers who exceed the USDAs income cap.
Since VA and USDA loans are government-backed, they can offer more favorable interest rates. According to the mortgage data and analytics company Optimal Blue, VA loan rates remained .232 percent lower on average than USDA in 2023.
While USDA interest rates are lower than other loan types, a .232 percent difference when compared to VA interest rates can equal thousands in interest savings over the life of the mortgage.
Over the last year, VA interest rates were slightly lower than USDA. However, interest rates largely depend on your financial situation.
USDA loans are subject to specific loan limits that depend on the borrowers income, location and size of the household. The limits vary depending on your situation, so it’s best to talk with your loan officer to determine your maximum loan amount. These limits are in place to ensure the program serves low to moderate-income homebuyers effectively.
Generally, VA loans dont have loan limits. In January 2022, a law was passed removing loan limits for first-time VA loan borrowers, allowing them to borrow as much as a lender is willing to lend without a down payment. However, limits may still apply to those who have previously used the VA loan benefit or reduced VA entitlement.
A VA loan typically offers more flexibility than a USDA loan if you have your full VA entitlement.
Answer a few questions below to speak with a specialist about what your military service has earned you.
A USDA loan is exclusively designed for homes located in eligible rural and suburban areas. The property must meet certain criteria and is obligated to an appraisal to ensure it’s safe, sanitary and structurally sound.
While VA loans are more flexible regarding the location, they still maintain strict standards for property conditions. VA-financed homes must pass a VA appraisal focusing on specific Minimum Property Requirements to ensure the home is safe, structurally sound and sanitary.
USDA and VA loans both require appraisals, but USDA loans are generally stricter due to location requirements.
USDA loans have an upfront guarantee fee and an annual fee. The upfront fee is 1% of the loan amount due at closing, while the annual fee of 0.35% is paid monthly. Although these fees arent as high as traditional private mortgage insurance (PMI), the annual fee is ongoing for the life of the loan.
VA loans have a one-time funding fee. The amount varies from 1.25% to 3.3% of the loan amount, depending on the down payment amount and whether this is the borrower’s first VA loan. For first-time use of a VA purchase loan, the funding fee is 2.15% of the loan amount. It can be paid upfront or rolled into the total loan amount. Some VA loan applicants are exempt from paying the funding fee and may waive the fee altogether.
For a USDA loan of $200,000, the total amount financed would be $202,000 with an additional $700 annual fee. For a VA loan of $200,000, the total amount financed would be $204,600 with no annual fee. It would take approximately 4 years for the total cost of the USDA loan to exceed the VA loan when factoring in the annual fee. After this point, the USDA loan will effectively be more expensive than the VA loan.
VA loans may be more cost-effective, but each situation is unique. Always calculate the total costs over the life of the loan.
USDA loans typically have closing costs ranging from 2% to 6% of the total loan amount. These can often be rolled into the loan or covered by up to 6% seller concessions, easing the initial financial outlay for the buyer.
In contrast, closing costs for VA loans typically range from 3% to 6% of the total loan amount, but the VA caps how much a Veteran can pay through “non-allowable fees.” Seller concessions are allowed up to 4%.
If youre on a tight budget, USDA seller concessions are more favorable at up to 6% of the loan amount.
VA Loan vs USDA Loan Similarities
Although USDA and VA loans each cater to different demographics, they share similar benefits.
USDA loans and VA loans both:
- Are government-backed
- Require no down payment
- Don’t have a minimum credit score set
- Are for primary residences only
- Don’t require mortgage insurance
100% Financing – Is a USDA or VA loan better?
What is the difference between a USDA & VA loan?
USDA and VA loans both offer credit score flexibility and do not have a set minimum, making homeownership more accessible. For a USDA loan, applicants typically should aim for a credit score of at least 640. This threshold allows lenders to streamline the application process. VA lenders consider the entire financial profile of the applicant.
Are VA loan rates lower than USDA?
According to the mortgage data and analytics company Optimal Blue, VA loan rates remained .232 percent lower on average than USDA in 2023. While USDA interest rates are lower than other loan types, a .232 percent difference when compared to VA interest rates can equal thousands in interest savings over the life of the mortgage.
Are VA & USDA home loans a good idea?
VA and USDA home loans are money-savers that charge few fees, eliminate the cost of mortgage insurance, require no down payment and finance 100% of the home’s cost. Not every borrower or property is eligible for either loan, but some homebuyers qualify for both. So, it’s important to know the benefits and drawbacks for VA loans and USDA loans.
Do you qualify for a VA or USDA home loan?
Two federal loan programs can make a big difference for those who qualify. VA and USDA home loans are money-savers that charge few fees, eliminate the cost of mortgage insurance, require no down payment and finance 100% of the home’s cost. Not every borrower or property is eligible for either loan, but some homebuyers qualify for both.