Buying your first home is an exciting milestone! But navigating the mortgage process can feel overwhelming for first-time buyers. Two popular government-backed loans, USDA and FHA, offer more flexible eligibility requirements than conventional mortgages. This makes them great options if your finances don’t fit the typical mortgage mold.
But how do you decide between a USDA loan and an FHA loan? While both help expand homeownership opportunities, these two programs have key differences.
In this guide, we’ll compare USDA and FHA loans to help you determine which is the better fit:
What Are USDA and FHA Loans?
First, let’s look at what defines these two mortgage programs:
USDA Loans
- Backed by the U.S. Department of Agriculture
- Require no down payment
- Only for homes in designated rural areas
- Have income limits to qualify
FHA Loans
- Backed by the Federal Housing Administration
- Require 3.5% down payment
- Available anywhere in the U.S.
- No income limits
The government backing allows for more flexible underwriting standards. However, it also means you’ll pay mortgage insurance no matter how much you put down.
USDA Loan Requirements
USDA loans help low-to-moderate income buyers purchase homes in rural locales. Here are the eligibility basics:
Location – Property must be in an eligible rural area as defined by the USDA. About 97% of the U.S. qualifies.
Income – Must be below 115% of the median income for your county. Limits vary by area.
Credit Score – Typically requires a minimum credit score of 640.
Down Payment – No down payment required. Can finance 100% of the home’s value plus closing costs.
Property Type – Must be a single-family residence and your primary home.
Mortgage Insurance – 1% upfront fee and 0.35% annual premium. Lasts for the full loan term.
Interest Rates – Set by lenders but very competitive due to government backing.
FHA Loan Requirements
FHA loans are more widely available and have looser eligibility standards. Here are the key details:
Location – Available anywhere in the U.S. – no geographic restrictions.
Income – No income limits.
Credit Score – Minimum of 580 with 3.5% down.
Down Payment – At least 3.5% required. Can go as low as 1.25% with gift funds.
Property Type – Can be a single-family home, condo, townhouse, or 2-4 unit property. Must be your primary residence.
Mortgage Insurance – Upfront fee of 1.75% of loan amount plus 0.45% – 1.05% annual premium.
Interest Rates – Set by lenders but very competitive due to government backing.
Key Differences Between USDA and FHA Loans
To summarize so far, here are some of the major differences between these two mortgage programs:
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Credit scores – FHA is more lenient, with a minimum of 580 versus 640 for USDA.
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Down payments – USDA requires none while FHA needs at least 3.5%.
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Locations – FHA is available everywhere, but USDA is limited to designated rural areas.
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Income limits – USDA has caps based on local median income while FHA has no limits.
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Property types – FHA allows condos and 2-4 units while USDA is just for single-family homes.
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Mortgage insurance – USDA’s upfront and annual premiums are cheaper than FHA’s.
These differences make each loan better suited for certain borrowers. Keep reading to learn which type of buyer may benefit more from USDA vs FHA loans.
Who Should Consider a USDA Loan?
USDA loans are a great fit for these types of buyers:
- First-time buyers with no down payment savings
- Homebuyers who fall within income limits for their county
- Those purchasing in rural locations
- Borrowers with minimal debts and a credit score of at least 640
The zero-down aspect makes USDA especially appealing to first-timers without much cash. Lower income households also benefit from USDA’s combination of low mortgage insurance costs and no-down mortgages.
Just be sure the home you want is in a USDA-eligible area. Use the USDA Property Eligibility tool to check.
Who Should Consider an FHA Loan?
FHA loans can work better than USDA loans for these borrowers:
- First-time buyers with minimal savings for a down payment
- Homebuyers with excessive debts or a credit score under 640
- Those buying in suburban or urban locales
- Buyers who need a condo, townhouse, or small multi-family property
- Households over the income limits for USDA in their county
The low down payment and flexible credit guidelines make FHA loans ideal for those who may not qualify for other financing. FHA is also a better fit for buyers purchasing homes in metro outskirts, cities, and towns that don’t meet USDA’s rural criteria.
How Do Mortgage Rates And Fees Compare?
Thanks to government backing, both USDA and FHA loans offer competitive interest rates. USDA rates may be slightly lower since the program is targeted at lower-income borrowers. But in general, expect rates around the same ballpark.
When it comes to costs, USDA loans are cheaper overall:
- No money needed for a down payment
- Lower upfront mortgage insurance premium (1% of loan amount vs 1.75% for FHA)
- Lower annual mortgage insurance rate (0.35% of loan balance vs 0.45% – 1.05% for FHA)
However, FHA loans allow you to cancel mortgage insurance once you build 20% home equity. With a USDA loan, you’d need to refinance into a conventional loan to remove mortgage insurance.
How Do I Know Which Loan Is Better For Me?
Choosing between USDA and FHA loans depends largely on your personal financial situation. Here are a few key questions to ask yourself:
- Is the home I want in a rural area? If unsure, check the USDA eligibility map.
- Do I qualify based on USDA’s income limits for my county? Look them up online.
- Is my credit score below 640? FHA may be the only option.
- Do I have excessive debts that may disqualify me from USDA? FHA is more flexible.
- Do I need a small multi-family home or condo? Only FHA allows those.
If you’re eligible for both loans, compare options from multiple lenders. Weigh the mortgage insurance costs against current rates and fees to see if USDA or FHA offers more savings.
Talk to a Loan Officer
There’s a lot to weigh when deciding between USDA and FHA loans. Speaking with an experienced loan officer makes the process smoother. They can check if you prequalify for both programs and explain how your personal financial profile fits each option.
At the end of the day, securing low mortgage rates and costs should be your top priority. Let a lending professional guide you in choosing the most affordable government-backed loan for your needs. With prequalification and expert advice, you can navigate the USDA vs FHA decision with confidence!
Pro: Flexible credit requirements
One of the biggest benefits of the FHA loan program is its low credit score threshold.
Most FHA lenders will accept credit scores as low as 580 with just 3.5% down. That’s a far cry from the USDA’s 640 credit minimum. The Federal Housing Administration will even allow FICO scores of 500–579. However, you’ll need to make a 10% down payment, and few lenders will actually approve scores this low.
FHA tends to be flexible when it comes to credit history, too. For example, FHA guidelines specifically state that a lack of credit history is not a reason to deny someone’s mortgage loan application.
If you have very little information on your credit report—or none at all—because you haven’t borrowed much in the past, an FHA loan is still an option. You’ll just have to prove your financial responsibility in another way, for example, with a 12-month history of on-time rent payments.
The USDA has similar rules, but it might be harder to find a USDA lender to approve you. With the FHA program, lenient credit requirements are the norm.
Which loan is better, USDA or FHA?
When it comes to USDA vs FHA, it all depends on your situation.
USDA loans allow no down payment and have cheap mortgage insurance, but you have to buy in a “rural” area and meet income limits. FHA loans are more flexible about income, credit, and location, but they can have higher costs.
Luckily, there’s an easy way to choose. Just ask your lender about USDA loans and FHA loans. You might be eligible for one but not the other. If you’re eligible for both, you can compare rates and fees to see which loan option is better for you.
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Are USDA or FHA Loans Better?
FAQ
Is FHA or USDA better?
Are USDA loan payments cheaper?
What is the advantage of a USDA loan?
What credit score do you need for a FHA and USDA 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.
Are USDA vs FHA loans better?
When comparing mortgage options, such as USDA vs FHA loans, the better choice largely hinges on one’s financial situation. For instance, individuals with lower credit scores may discover that FHA loans suit their needs best.
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?