If you are a prospective homebuyer exploring different mortgage options you may be weighing the pros and cons of USDA loans versus VA loans. Both loan types offer unique benefits tailored to certain borrowers and determining which one better suits your needs depends on fully understanding the eligibility requirements and key differences between the two.
In this comprehensive guide, we’ll walk through everything you need to know about USDA and VA loan requirements to make an informed decision With interest rates on the rise, choosing the right loan for your situation is more important than ever in 2023
Overview of USDA and VA Loans
First, let’s briefly introduce both loan types.
USDA loans are government-backed mortgages issued by the United States Department of Agriculture for low to moderate income borrowers in rural and suburban areas These loans require no down payment and have flexible credit guidelines,
VA loans are mortgages backed by the Department of Veterans Affairs for eligible military members and spouses. VA loans also feature no down payment options and loose credit standards.
While USDA and VA loans share some similarities, their eligibility guidelines differ significantly. We’ll explore those key differences next.
USDA and VA Loan Eligibility Requirements
When it comes to eligibility, USDA and VA loans take very different approaches.
USDA Loan Eligibility
Here are the basic criteria to qualify for a USDA loan:
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Your income must be below the limit set for your area and household size. Income thresholds range from roughly $60,000 to $140,000 depending on location and family composition.
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The home you wish to purchase must be located in a USDA-designated rural or suburban area. You can verify eligibility by using the USDA Property Eligibility Site.
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You must demonstrate a willingness and ability to repay the mortgage. Lenders typically look for a minimum credit score around 640.
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The property must serve as your primary residence.
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You must meet citizenship and other legal requirements to incur federal loan obligations.
As you can see, USDA loan eligibility revolves around income limits, property location, credit profile and legal status. Your military service does not factor into getting approved.
VA Loan Eligibility
VA loans have entirely different eligibility standards focused on military status:
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You must be an active duty service member, veteran, member of the National Guard/Reserves or a surviving spouse of someone who served.
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To qualify for full VA loan benefits, you need to meet service requirements like minimum time deployed. These vary based on when and which branch you served.
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National Guard/Reserve members must have at least 6 years of service with an honorable discharge.
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Surviving spouses need to show their deceased spouse died from service-related injuries or disabilities.
Unlike USDA loans, VA loan eligibility is not tied to your income, debts, credit scores or property location. As long as you meet basic VA entitlement criteria, you can qualify regardless of those factors.
Comparing Loan Terms and Conditions
Now that we’ve covered the core eligibility differences, let’s explore how USDA and VA loans compare across other key areas like loan limits, interest rates, fees and more.
Loan Limits
USDA loans have caps on the maximum amount you can borrow based on factors like your income, where the home is located and family size. Loan limits typically range from about $200,000 to $625,000.
VA loans do not have set lending limits. Qualified VA borrowers with full entitlement can borrow up to 100% of the home’s value. However, limits can apply if you have previously used your VA benefits.
Interest Rates
USDA and VA loans often offer lower interest rates than conventional loans, although VA rates are generally the lowest of the two. According to 2022 data, average VA rates were .23% less than USDA. Rates are also fixed for the life of both loan types.
Fees
USDA loans charge an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%. VA loans have a one-time funding fee that typically ranges from 1.4% to 3.6% of the loan amount. No annual fee is charged.
Credit Requirements
Neither USDA nor VA loans dictate a minimum credit score. However, most lenders look for at least a 640 FICO score for USDA and 620 for VA loans. VA guidelines offer more flexibility for lower scores.
Downpayments
A key benefit of both USDA and VA loans is the ability to qualify with zero down payment. However, a down payment can help reduce interest rates.
Mortgage Insurance
Mortgage insurance is not required on USDA or VA loans, saving borrowers significant costs.
USDA and VA Property Requirements
In addition to eligibility standards for the borrower, USDA and VA loans also have guidelines for the actual property being financed:
USDA Property Requirements
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Home must be located in a rural or suburban designated area. Eligibility can be verified on USDA site.
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Property must be modest in size, design and cost.
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Home must pass an appraisal inspection focused on health, safety and structural soundness.
VA Property Requirements
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Home must pass VA minimum property standards and appraisal.
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Property must be your primary residence and a single-family home or eligible condo.
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Veteran must personally occupy home within 60 days of closing.
While VA guidelines are flexible for location, the property must still meet VA appraisal and occupancy standards.
How to Choose: USDA vs VA Loan
If you qualify for both loan types, deciding whether to go with a USDA or VA loan depends on your specific situation:
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USDA Pros: Great option if you meet income limits and are buying in a rural/suburban area eligible for the program. May offer better rate reduction opportunities through seller contributions.
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VA Pros: Ideal if your income exceeds caps, you want to buy in an urban area or desire lower rates/fees long-term. More flexibility if credit score under 640.
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VA Cons: Must meet military service requirements and occupancy timeline. Potentially higher funding fee without an exemption.
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USDA Cons: Limited to certain geographic areas and income brackets. Ongoing annual fee makes long-term costs higher than VA loans.
As this overview illustrates, fully understanding the nuances between USDA and VA loan requirements is crucial to identifying the better match. Carefully compare the pros and cons before deciding which mortgage type is right for you.
Work With a Trusted Lender to Get Started
The homebuying process can feel overwhelming, especially as interest rates rise in 2023. But the good news is USDA and VA loans make buying more affordable with benefits like no down payment options and lower rates.
As your trusted lender, we are here to guide you through every step. Our experienced loan officers will answer all your questions about USDA and VA loans. We can pre-qualify you to see which programs you are eligible for, and then handle the full application and approval process.
Don’t hesitate to give us a call today to start exploring your home financing options. We are ready to help you navigate USDA and VA loan requirements and achieve the keys to your new home!
Monthly Mortgage Insurance Premium (MIP) Requirements
- USDA requires a monthly mortgage insurance premium with an annual factorial of .35%
- USDA primarily often won’t allow applicants to own other properties
- Exceptions include when the other property owned is:
- Not owned in the local commuting area as the new property; or
- Not structurally sound and/or functionally adequate
- Manufactured home not on a permanent foundation
- 29/41% debt-to-income (DTI) – Target
- 33.99/45.99% debt-to-income (DTI) – With compensating factors such as:
- 680 or higher credit score
- No or low “payment shock” – less than a 100% increase in proposed mortgage payment Vs. current rental housing expenses
- Fiscally sound use of credit
- Ability to accumulate savings
- Stable employment history with 2 or more in current position or continuous employment history with no job gaps
- Cash reserves available for use after settlement
- Career advancement as indicated by job training or additional education in the applicants profession
- Trailing spouse income – as a result of a job transfer, the house is being purchased, prior to the secondary wage-earner obtaining employment. If the secondary wage-earner has an established history of employment and has a reasonable chance to obtain new employment in the area
- Low total debt load
- 6% of sales price towards closing costs, prepaids, discount points, buydown fees, and upfront Commitment Fee
- Purchase
- Rate/Term Refinance on existing USDA loan
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- U.S. citizens
- Permanent resident aliens
- First time homebuyers allowed
- Non-occupant co-borrowers NOT allowed
- USDA charges a 1% Commitment Fee
- Commitment Fee can be financed into the loan
- Example:
- Purchase price – $100,000
- Base Loan amount – $100,000
- Commitment Fee – $1,010 ($100,000 [purchase price] /.99 – 100,000)
- Maximum financed loan amount = $101,010
- No down payment is required
- If borrower has adequate liquid assets (i.e. 20% of the property purchase price) to obtain conventional financing the borrower may be ineligible for the USDA Rural Development Loan
- Must be in an eligible USDA Rural Development Location
- Owner-occupied properties
- Existing attached & detached single family residences
- New construction with permanent financing only
- PUD’s (i.e. Townhomes)
- Condo-units. HUD, VA, FNMA or FHLMC approved project
- Log cabin homes, provided Appraisal Report lists other comparable log cabin homes that have recently sold in the area
- Co-ops
- Mixed-use
- Condotels
- Manufactured homes
- Single Family Homes where the land value excess 30% of the appraised value and can be sub-dividend.
- Minimum loan amount: $80,000 standard purchase/refinance transaction. $120,000 for construction and renovation transactions. (Note, this is an internal lender guideline. The USDA Loan program has no minimum loan amount guideline. If you are purchasing a house with a price less than $80,000 contact other lenders to determine if they will service your mortgage requirements.)
- Maximum loan amount: No limit. The maximum loan amount that a borrower can qualify for will be determined by the borrowers debt to income ratio and Guaranteed Underwriting System’s findings
- County specific. Reference the USDA website for adjusted household income limits
- Maximum loan-to-value is 101.01%
- Middle Credit Score – 640 for each applicant for GUS automated underwritting approval
- Middle Credit Score – 580 for each applicant for manual underwritting approval and a documentable rent history within the last 12 months
2023 USDA Loan Requirements – Complete Guide For First Time Home Buyers
FAQ
What is the income limit for an USDA loan in Virginia?
Why would you get denied for USDA loan?
What is a USDA loans VA?
What credit score do you need for a VA loan?
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.
What are the requirements for a USDA loan?
Some general requirements, however, apply to all USDA loans, specifically those based on both buyer and property eligibility. Eligible rural area: The USDA defines an eligible area as having a population of 20,000 or fewer. Check the USDA’s eligibility site or the map below.
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.
How does the USDA finance a home loan?
The USDA provides funding for direct loans, which have favorable terms like low interest rates (as low as 1% with payment assistance) and long repayment periods (up to 38 years for eligible applicants). Income, creditworthiness, and the property’s location in an eligible rural area all affect eligibility.