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 looking to buy a home with no down payment, USDA loans and VA loans are two great options to consider. Both loan programs are backed by government agencies and allow borrowers to finance 100% of the purchase price. This makes them more accessible for homebuyers who can’t afford a down payment.
But while USDA and VA loans share some similarities, there are also key differences between the two. Understanding how these two zero-down mortgage programs differ is important when deciding which one may be the better fit for your situation.
In this comprehensive guide, we’ll compare USDA loans vs VA loans across the most important factors. Read on to learn more about eligibility requirements, loan limits, interest rates, and other key distinctions between these two popular loan programs.
Overview of USDA and VA Loans
First, let’s briefly introduce USDA and VA loans:
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USDA loans are issued by private lenders but backed by the U.S. Department of Agriculture’s Rural Development office. They help low-to-moderate income buyers in rural and suburban areas purchase homes with no down payment.
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VA loans are issued by private lenders and guaranteed by the U.S. Department of Veterans Affairs They assist eligible veterans, active duty military, reservists, and surviving spouses buy a home without any down payment
Now let’s dive into the details and see how USDA loans and VA loans stack up across the key factors
USDA Loan vs VA Loan Eligibility
Eligibility requirements for USDA and VA loans differ quite a bit
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USDA Loans: Available to the general public in eligible rural and suburban areas. Household income must be below set limits based on location.
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VA Loans: Only available to veterans, active duty military, reservists, and surviving spouses. No income limits.
So VA loans are exclusively for the military community while USDA loans can assist other buyers in rural locations.
Geographical Limitations
When it comes to location, VA loans are far less restrictive:
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USDA Loans: Property must be located in a USDA-designated rural or suburban area. Not available in cities.
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VA Loans: Available in urban, suburban, or rural locations across all 50 states. Very few geographical limits.
VA loans can be used in almost any location, whereas USDA loans are limited to approved rural and suburban counties.
Loan Limits
The two loan types also differ when it comes to maximum loan amounts:
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USDA Loans: No set maximum loan limit. Limit based on income, assets, and debt ratios.
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VA Loans: Max loan limit of $647,200 for most counties, higher in expensive areas.
So USDA loans look at your full financial profile while VA loans have a defined max loan amount that may constrain larger purchases.
Credit Score Requirements
When it comes to credit scores, here’s how USDA and VA loans compare:
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USDA Loans: No official minimum but most lenders want 640+ FICO score.
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VA Loans: No set minimum but lenders generally look for at least 620+ FICO score.
So while both are flexible, VA loans may have slightly lower credit requirements than USDA loans on average.
Downpayments
The big draw of USDA and VA loans is that they both offer zero down payment options:
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USDA Loans: No down payment required. Can even roll closing costs into loan.
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VA Loans: Zero down payment even on purchases up to $647,200 in most counties.
If you want to buy a home with minimal cash out of pocket, both VA and USDA loans make this possible.
Mortgage Insurance
Here’s how mortgage insurance works with both loan programs:
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USDA Loans: 1% upfront fee + annual 0.35% premium added to loan amount.
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VA Loans: One-time VA funding fee added to loan amount, no monthly mortgage insurance.
So USDA loans charge an annual mortgage insurance premium while VA loans just have a single upfront funding fee.
Interest Rates
USDA loans tend to have slightly higher interest rates:
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USDA Loans: Rates may be 0.25 to 0.5% higher than VA loans, depending on your credit.
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VA Loans: Typically have very competitive interest rates, just above conventional loans.
VA’s large-scale lending program gives them an advantage when it comes to interest rates. USDA rates can be a bit higher.
Origination Fees
Upfront loan costs are similar between USDA and VA loans:
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USDA Loans: Around 1-2% of the loan amount in origination fees.
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VA Loans: Origination fees generally 1-2% of the total loan amount.
You can expect to pay comparable origination fees and closing costs on both types of mortgages.
Income Limits
When it comes to income restrictions, here is the key difference:
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USDA Loans – Moderate income limits based on location, typically 115% of area median income.
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VA Loans – No income limits, qualify regardless of income level.
So VA loans are better if your income exceeds USDA limits in your county. But USDA loans open homeownership to buyers above conventional conforming loan limits but below VA income threshold.
Property Types
The property types eligible for purchase are similar:
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USDA Loans: Single family homes, townhomes, condos. No income producing properties.
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VA Loans: Single family homes, condos, some multi-unit properties owner occupied.
The main difference is VA loans allow 2-4 unit multi-family properties while USDA loans are limited to single family residences.
Renovation Loans
For fixer-uppers, both programs offer rehab loans:
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USDA Loans: Single-close construction loans up to $27,500 available.
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VA Loans: VA rehab loans finance purchase plus renovation costs in one loan.
So buyers can finance an existing home needing repairs or a construction loan with either program.
Which Is Better – USDA or VA Loan?
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VA loans are better if you have higher income, lower credit score, or want to buy in cities
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USDA loans may offer lower rates for very low income borrowers or those buying rural homes
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VA loans have higher loan limits and less geographical restrictions
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USDA loans are open to non-military but have income caps and rural location requirements
For eligible veterans or active duty military, VA loans will be the better choice in many situations thanks to flexible guidelines. But for low to moderate income civilian buyers in rural areas, USDA loans can provide a great zero down mortgage option where VA loans fall short.
So in the end, look closely at the eligibility factors and your own home buying goals to determine if a USDA loan or VA loan better matches your needs and financial situation. This will help guide you to selecting the ideal zero down mortgage program.
Which is better a USDA loan or a VA loan?
Deciding if a USDA or VA home loan is better depends on your situation and needs.
A VA loan might be the best option if you want to avoid income and loan limits or your credit score is on the lower end. Although there is a one-time VA funding fee, you may qualify for an exemption, which isn’t possible for USDA program fees.
A USDA loan may be a better option if you are looking to purchase a home in an eligible rural area or meet the low to moderate income limit. These loans also allow more opportunity when negotiating costs with the home seller.
No matter what your homebuying goals are, Veterans United is here to help. Talk with a VA home loan expert to get a complete comparison for your unique homebuying journey.
About Our Editorial Process
Veterans United is recognized as the leading VA lender in the nation, unmatched in our specialization and expertise in VA loans. Our strict adherence to accuracy and the highest editorial standards guarantees our information is based on thoroughly vetted, unbiased research. Committed to excellence, we offer guidance to our nations Veterans, ensuring their homebuying experience is informed, seamless and secured with integrity.
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.
100% Financing – Is a USDA or VA loan better?
FAQ
Is USDA better than VA?
What’s better, a USDA loan or a VA loan?
Is it a good idea to get a USDA loan?
Which one is better a USDA loan or an FHA loan?
What is the difference between a VA loan and a USDA loan?
USDA and VA loans are often compared because of their benefits. While both can make homeownership more accessible, the two loan types differ in a few key ways. USDA loans are restricted to single-family homes, as properties are not permitted to produce income. You can purchase up to a four-unit property with a VA loan.
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.
What is a USDA loan?
USDA loans are mortgages backed by the U.S. Department of Agriculture. They’re reserved for buyers in more rural parts of the country, and they’re only available in certain areas. Borrowers also need to fall under the set income threshold for their community. Like VA loans, USDA loans require no down payment. Minimum down payment: Zero