USDA Loans vs. FHA Loans: Which Is Better for First-Time Homebuyers?

Buying your first home is an exciting milestone! But it can also be overwhelming, especially when it comes to choosing the right mortgage. Two popular options for first-time homebuyers are USDA loans and FHA loans. But what’s the difference, and which one is better?

In this article, we’ll compare USDA and FHA loans side-by-side so you can make an informed decision.

What Are USDA and FHA Loans?

First, let’s start with an overview of each type of loan:

• USDA loans are backed by the US Department of Agriculture. They help low-to-moderate income buyers purchase homes in eligible rural and suburban areas.

• FHA loans are insured by the Federal Housing Administration. They help first-time buyers and those with lower credit scores or incomes buy a home with low down payments.

Both loans make homebuying more affordable by requiring lower credit scores and down payments than conventional loans. But they have some key differences.

USDA Loan Requirements

To qualify for a USDA home loan:

• Your household income must be below the income limit for your area (typically 115% of the median income).
• You must purchase a home in an eligible rural or suburban area. Around 97% of U.S. zip codes qualify.
• You can have a credit score as low as 640, depending on the lender. Manual underwriting is available for scores below 640.
• Debt-to-income ratio must be 29%/41% or less (front-end/back-end).
• No down payment is required. You can finance 100% of the purchase price plus closing costs.

FHA Loan Requirements

For an FHA mortgage:

• There are no income limits. You just need to prove you can afford the payments.
• The home can be located anywhere in the U.S. – urban, suburban or rural.
• Minimum credit score is 580 with a manual underwrite or as low as 500 with an automated underwrite.
• Maximum debt-to-income ratio is typically 50%.
• Down payment is just 3.5% of the purchase price.

Comparing Loan Terms

Loan Feature	USDA Loan	FHA Loan
Available Terms	30-year fixed	30-year fixed, 15-year fixed, 5/1 ARM
Maximum Loan Amount	No limit, based on eligibility	Varies by county, typically $420,680 to $970,800
Mortgage Insurance	1% upfront fee + 0.35% annual	1.75% upfront + 0.45% to 1.05% annual
Interest Rates	Set by lenders, very competitive	Set by lenders, very competitive
Downpayment	0%	3.5% with 580+ credit score
Credit Score	Typically 640+	580+
Income Limits	Yes	No
Property Location	Rural/suburban areas	Nationwide

As you can see, FHA loans offer more flexibility with location, income, and credit requirements. But USDA loans allow for zero down payment and slightly lower mortgage insurance.

USDA Loan Pros and Cons

Pros:

• No down payment required
• Can finance 100% of purchase price plus closing costs
• Low mortgage insurance rate
• Competitive interest rates
• Fixed 30-year term builds equity faster

Cons:

• Strict income and property location limits
• Manual underwriting with scores below 640
• Upfront guarantee fee of 1%
• Annual fee for life of loan
• Slower approval process with double underwriting

FHA Loan Pros and Cons

Pros:

• Available nationwide
• No income limits
• Lower credit score requirements
• Low 3.5% down payment
• Various term options – 15/30-year fixed and 5/1 ARM

Cons:

• Must put 3.5% down
• Higher mortgage insurance costs
• Upfront mortgage insurance premium
• Annual premium for 11+ years

Which Is Better for First-Time Homebuyers?

For most first-time buyers, FHA loans offer more flexibility and options. The low down payment and minimum 580 credit score make them accessible nationwide. Although you’ll pay a bit more in mortgage insurance, FHA loans are a great choice if you don’t meet USDA requirements.

That said, USDA loans can be a better option if you:

• Have a household income within USDA limits
• Purchase in a rural/suburban area
• Want to put 0% down

Be sure to talk to a lender about your specific situation. They can check your eligibility and provide rate quotes for both loans so you can compare overall costs.

While USDA and FHA loans have differences, they both make homebuying more feasible for buyers who may not qualify for conventional mortgages. Comparing the pros and cons of each will help you make the best choice to achieve your dream of homeownership.