Conventional Loans vs USDA Loans: How To Choose The Right Mortgage

If you’re trying to decide between a conventional loan and a USDA loan for your home purchase or refinance, it’s important to understand the key differences between these two common mortgage options. While both offer viable paths to homeownership, conventional and USDA loans have different requirements, costs, and benefits. This comprehensive guide examines conventional vs USDA loans to help you determine which is the better fit

Conventional Loan Overview

Conventional mortgages are the most widely available and popular type of home loan They are given out by private lenders like banks and credit unions and are not backed by the federal government Here are some quick facts about conventional loans

• Available for primary residences, second homes, and investment properties
• No specific location or income requirements
• Typically require a minimum down payment of 3-20%
• Credit score requirements vary by lender, usually 640+
• Private mortgage insurance (PMI) required if down payment under 20%
• Sold to Fannie Mae and Freddie Mac after closing

Conventional loans come in a variety of terms including 15-year, 20-year, and 30-year fixed rates as well as adjustable-rate mortgages (ARMs) Their key advantage is flexibility – you can use them to purchase or refinance just about any residential property with minimal restrictions

USDA Loan Overview

USDA loans are government-backed mortgages issued by private lenders but insured by the U.S. Department of Agriculture. They help lower income borrowers in rural areas achieve homeownership. Here’s an overview:

• Only available for primary residences in eligible rural locations
• Income limits based on local area median income
• No down payment required
• Minimum credit score of 640
• Upfront guarantee fee and annual fee required
• Typically 30-year fixed rate terms only

USDA loans offer two major benefits – the ability to buy with no money down and lower rates than conventional loans. But their strict property and borrower requirements limit their availability compared to conventional mortgages.

Comparing Loan Requirements

When deciding between conventional and USDA loans, here are some key requirement differences to consider:

Property Location

Conventional: Available for any property nationwide

USDA: Home must be in an eligible rural area as designated by the USDA property eligibility map

Occupancy Type

Conventional: Can be used for primary residences, second homes, and investment properties

USDA: Only for primary residences where you’ll live in the home

Down Payment

Conventional: Typically 3-20% down required

USDA: Zero down payment programs available

Income Limits

Conventional: No income limits

USDA: Household income must be below 115% of area median income

Credit Scores

Conventional: Usually 640+ but varies by lender

USDA: Minimum credit score of 640

As you can see, USDA loans are more restrictive in where you can buy and how much you can earn. Conventional loans offer more flexibility but may require you to put money down.

Key Differences in Fees and Rates

In addition to their requirements, here are some notable differences between conventional and USDA loans when it comes to fees, insurance, rates, and closing costs:

• Mortgage Insurance: Conventional loans require private mortgage insurance if your down payment is under 20%. USDA loans charge an upfront guarantee fee at closing and an annual fee built into your monthly payments.

• Interest rates: USDA loans typically offer lower rates as they are government-backed. Rates for conventional loans vary more widely based on market conditions.

• Closing costs: Closing costs are similar for both loan types. The USDA guarantee fees add $2,000-$3,000 in fees compared to conventional loans.

• Origination/discount points: Conventional loans let you pay points to lower your rate. USDA loans do not offer discounted points.

Weighing the differences in mortgage insurance, rates, and fees will help you determine which option saves you the most money long-term.

Getting Approved with Each Loan

Approval criteria varies between conventional and USDA loans as well. Here are some key considerations:

• Credit scores: Conventional loans can be approved down to 640 in some cases. USDA loans have a firm minimum of 640.

• Debt-to-Income ratio: Aim for 36% DTI or less for both loan types. USDA may be more flexible.

• Manual underwriting: USDA loans allow manual underwriting if your score is between 600-639. This involves a deep look at your financial history.

• Home appraisal: The property condition thresholds are stricter with USDA loans than conventional loans.

While low down payment USDA loans are appealing, their stricter credit and underwriting standards make them slightly harder to qualify for. Conventional loans offer more underwriting flexibility in some cases.

Which Loan Has the Fastest Approval?

USDA loans generally take longer to approve due to the extra step of the USDA reviewing your application after the lender does. The typical timeline is:

Conventional: 1 week – 1 month

USDA: 1-2 months

So if you need to close quickly, a conventional loan may be the faster option. However, working with an experienced USDA lender can help expedite the process.

Alternatives to Consider

Beyond conventional and USDA loans, here are two other options that combine elements of each:

• FHA loans – Require just 3.5% down like conventional loans but are government insured. Credit score requirements start at 580.

• HomeReady® mortgages – Conventional loans from Freddie Mac with income limits and down payment assistance options.

Looking at all your choices will ensure you find the right mortgage or refinance loan for your needs!

Which Loan is Right for You?

Deciding between a conventional or USDA home loan depends largely on your individual scenario. Ask yourself:

✓ Do you meet the income limits for a USDA loan?

✓ Is the home you want located in a USDA-eligible rural area?

✓ How much money do you have saved for a down payment?

✓ What kind of home are you purchasing – primary, secondary, investment?

✓ How quickly do you need to close on the home?

Once you consider these factors, you’ll be better informed to choose between conventional and USDA loans. If you’re ready to move forward, connect with a reputable mortgage lender who can help analyze your situation and present loan products tailored to your needs.