Buying your first home is an exciting milestone, but it can also be daunting, especially when it comes to choosing the right mortgage. Two popular options for first-time and low-to-moderate income homebuyers are USDA and FHA loans. But what’s the difference, and which one is better for you?
In this comprehensive guide, we’ll compare USDA and FHA loans side-by-side so you can make an informed decision
Both USDA and FHA loans are government-backed mortgages that offer lenient borrowing requirements to make homeownership more accessible
USDA loans are guaranteed by the U.S. Department of Agriculture. They help low-to-moderate income buyers purchase homes in rural and suburban areas.
FHA loans are insured by the Federal Housing Administration. They have flexible credit requirements so those with poor or limited credit histories can still qualify.
While both loans offer competitive interest rates and low down payments, there are some key differences between the two programs.
USDA Loan Overview
USDA loans, also known as Section 502 Direct Loans, have the following features:
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No down payment required. 100% financing available.
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Low mortgage insurance. An upfront fee of 1% of the loan amount, plus 0.35% annually.
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Fixed interest rate. The rate is set by the lender but very competitive.
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No income limits. But the property must be modest and affordable based on your income.
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Purchase only. USDA loans can’t be used for refinancing.
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Single-family homes. No condos or multi-family properties.
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Primary residence only. Not for vacation or investment properties.
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Rural areas only. Property must be in an eligible rural or suburban zone.
FHA Loan Overview
Key features of FHA loans include:
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Low down payment. Just 3.5% required with a credit score of 580 or higher.
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Lenient credit standards. Minimum 580 FICO score required in most cases.
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Low mortgage insurance. An upfront fee of 1.75% of the loan amount, plus 0.45% to 1.05% annually.
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Fixed or adjustable rates. Your choice of a 15, 20, or 30-year fixed rate or a 5/1 or 7/1 adjustable rate.
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High debt tolerance. FHA allows debt-to-income ratios up to 57%.
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Nationwide availability. No geographic restrictions like USDA loans.
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Condos allowed. FHA approves more condos than most conventional loans.
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Primary residence, vacation home, or investment property. FHA loans can be used for any of these property types.
Comparing Eligibility Requirements
Now let’s take a close look at the eligibility differences between USDA and FHA loans:
Credit Scores
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USDA requires a minimum credit score of 640.
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FHA requires just 580 for 3.5% down or 500 with 10% down.
Clearly, FHA is the better option for buyers with poor credit.
Down Payments
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USDA requires 0% down.
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FHA requires 3.5% down for scores 580+ or 10% down for 500-579.
USDA is better if you want to minimize cash needed to close.
Debt-to-Income Ratio
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USDA allows up to 41% DTI.
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FHA allows up to 57% DTI.
FHA provides more flexibility for buyers with high existing debts.
Property Types
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USDA is limited to single family homes in rural areas.
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FHA allows condos and urban properties nationwide.
FHA is more flexible on property types and locations.
Occupancy Status
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USDA is for primary residences only.
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FHA allows primary home, vacation home, or investment property.
FHA gives buyers more options on how they can use the property.
Loan Purpose
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USDA is for purchase only.
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FHA allows purchases and refinances.
FHA better suits those looking to refinance an existing mortgage.
Interest Rates and Fees
USDA and FHA loans often have similar interest rates since they are both government-backed. However, here are some key differences in their costs:
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USDA has lower upfront and annual mortgage insurance rates.
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FHA caps its interest rate at 2.25% above the market average. USDA has no interest rate cap.
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USDA limits lender origination fees to 1.5% of the loan amount. FHA has no limits on origination fees.
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USDA has no loan limits. FHA caps range from $294,515 to $726,525 depending on location.
Overall, USDA loans tend to be cheaper than FHA loans thanks to lower mortgage insurance costs and uncapped loan amounts.
The Application Process
When applying for USDA vs FHA loans, you can expect:
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USDA approvals involve underwriting by both the lender and USDA, so can take 30-45 days.
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FHA approvals go through the lender only, so can be faster at around 30 days.
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Both programs require a similar list of documentation such as pay stubs, tax returns, and bank statements.
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USDA has stricter appraisal requirements regarding home quality and location.
The FHA approval process is often faster due to single underwriting. USDA appraisals are a bit stricter.
Pros and Cons of USDA Loans
| Pros | Cons |
|---|---|
| No down payment | Limited to rural areas |
| Lowest mortgage insurance | Stricter credit score requirements |
| No income limits | Purchase only, no refinancing |
| Lowest interest rates | Single family homes only |
| Simple application | Slower approval process |
Best for: First-time buyers who want to minimize cash needed to purchase a home in a rural location and meet minimum credit score requirements.
Pros and Cons of FHA Loans
| Pros | Cons |
|---|---|
| Minimum 580 credit score | Required down payment |
| Low 3.5% down payment | Higher mortgage insurance costs |
| Allows condos and urban homes | Potentially higher interest rates |
| Purchase or refinance | Strict appraisal requirements |
| High DTI tolerance |
Best for: Buyers with weaker credit or high debt who need more flexible property and loan options.
Which Is Better for You?
As you can see, both USDA and FHA loans have pros and cons. The right loan depends on your specific situation and financial goals.
USDA tends to be best for:
- First-time buyers who want to buy in a rural location
- Buyers with limited savings for a down payment and closing costs
- Applicants with at least a 640 credit score
FHA tends to be best for:
- Buyers who don’t meet USDA’s credit score requirements
- Those purchasing a condo or home in an urban area
- Applicants with high debt-to-income ratios
- Borrowers interested in refinancing an existing loan
The only way to know for sure which loan you qualify for is to apply with a lender. I recommend starting with a mortgage pre-approval, which involves a soft credit check and gives you a letter verifying your loan eligibility.
With mortgage pre-approvals from both USDA and FHA lenders, you can compare their loan estimates side-by-side and see which program truly offers you the best deal.
As you navigate the mortgage process, feel free to reach out with any questions! I’m happy to help explain the pros and cons of both loans and guide you to the best fit.
USDA vs FHA: Eligibility
A large part of the decision between USDA vs. FHA loans will depend on which type of mortgage you qualify for. Here’s a brief overview of how USDA and FHA eligibility requirements compare.
| Criteria | FHA Loans | USDA Loans |
| Loan Requirements | Minimum credit score of 580 for 3.5% down payment Steady employment history Property must be primary residence | Must meet income eligibility Property must be in a USDA eligible area Property must be primary residence |
| Loan Limits | Vary by county, but typically up to $ for single-family homes in most areas | No set loan limit, but the home must be modest in size for the area, and cannot have luxury features |
| Income Limits | None | Usually 115% of area median income (AMI) |
| Appraisal | Required Must meet HUDs minimum property standards | Required Must meet USDAs property and location requirements |
| Down Payment | Minimum of 3.5% with a credit score of 580 or higher 10% for credit scores between 500-579 | No down payment required |
| Mortgage Insurance | Upfront mortgage insurance premium (1.75% of the loan amount) Annual mortgage insurance premium (0.45% to 1.05% of the loan amount, paid monthly) | Upfront guarantee fee (1% of the loan amount) Annual fee (0.35% of the loan amount, paid monthly) |
| Interest Rates | Vary by lender, credit score, down payment, and other factors Typically lower for borrowers with good credit | Set by the lender, but can be as low as current market rates due to government backing |
| Closing Costs | Vary by lender, but can include appraisal fees, credit report fees, lenders origination fees, etc. Can be covered by seller or lender | Can include appraisal fees, credit report fees, lenders origination fees, etc. Can be rolled into the loan amount or paid by the seller |
The FHA program offers 30-year and 15-year fixed-rate mortgages, along with adjustable-rate mortgages (ARMs). The USDA offers only a 30-year fixed-rate loan.
In addition, both programs require you to buy a primary residence, meaning you can’t use them for a vacation home or investment property. However, FHA loans can finance multi-family homes with 2, 3, or 4 units, whereas a USDA loan can be used only for a single-family home.
Con: Income limits apply
The Rural Development Loan was created to spur homeownership in rural areas, especially among low- and moderate-income home buyers who might not otherwise qualify.
As such, the USDA publishes income limits. Maximums are set at 115% of the median income for your county or area. But these limits aren’t overly restrictive. The following are examples of maximum household incomes in various locales around the country:
- Denver, Colorado: $112,850
- Portland, Oregon: $105,950
- Philadelphia, Pennsylvania: $111,100
- Albany County, Wyoming: $92,450
You can find the current USDA income requirements for your area here.
Not everyone will fall within the USDA income limits. That’s where FHA comes in. FHA loans come with absolutely no income limits for their standard program.
Are USDA or FHA Loans Better?
FAQ
Is USDA or FHA better?
Is a USDA loan a good idea?
What credit score do you need for a FHA and USDA loan?
Are USDA loan payments cheaper?
Are FHA loans more expensive than USDA loans?
Both types of loans usually have interest rates comparable to or lower than the interest rate you’ll pay for a conventional loan. However, because of the mortgage insurance requirement, both USDA and FHA loans could be more expensive over the life of the loan.
How do I qualify for an FHA vs USDA loan?
Being eligible for an FHA vs. USDA loan means meeting specific requirements. To qualify for an FHA loan, prepare to: Make a down payment of at least 3.5% with a credit score of 580 or higher, or a down payment of 10% with a credit score between 500 and 579. Pay an upfront mortgage insurance premium at closing equivalent to 1.75% of the loan.
What is the difference between FHA and USDA mortgages?
The FHA program offers 30-year and 15-year fixed-rate mortgages, along with adjustable-rate mortgages (ARMs). The USDA offers only a 30-year fixed-rate loan. In addition, both programs require you to buy a primary residence, meaning you can’t use them for a vacation home or investment property.
Why are USDA and FHA loans so popular?
Home buyers with low or moderate incomes may gravitate toward mortgages with more lenient borrowing requirements, especially when it comes to down payments and mortgage insurance. This is why USDA and FHA loans can be so appealing to borrowers. How do the two types of mortgage loans differ, though?