Purchasing a home is one of the most significant financial decisions you can make. With so many loan options available, it can be challenging to determine which mortgage best suits your needs. Two popular government-backed loans, VA and USDA, offer special benefits to eligible borrowers While these loans share some similarities, their specific eligibility and underwriting requirements differ greatly
In this comprehensive guide, we will compare VA and USDA loan qualification, property standards, fees, and other key factors. Understanding the nuances of each program will empower you to make an informed decision when choosing a mortgage. Whether you are a Veteran, meet rural area requirements, or qualify based on income limits, you can leverage these government programs to achieve affordable homeownership.
Overview of VA Loan Requirements
Backed by the Department of Veterans Affairs, VA loans offer service members, Veterans, and select spouses the chance to buy a home with no down payment. These loans have more relaxed underwriting standards, making them one of the most accessible loans available.
To qualify for a VA loan you must
- Have served at least 90 days on active duty during wartime or 181+ days during peacetime
- Receive an honorable or general under honorable conditions discharge
- Have sufficient income and credit to qualify
VA loans have no set minimum credit score, but most lenders look for at least a 620 FICO score. Your debt-to-income ratio can be as high as 60% with sufficient compensating factors. Other criteria like residuals income are also considered.
Unlike conventional loans, VA does not require private mortgage insurance (PMI) or a down payment. This reduces out-of-pocket costs substantially. VA loans also have more flexible guidelines regarding property type and do not have maximum loan limits for most borrowers.
Overview of USDA Loan Requirements
USDA home loans cater to low-to-moderate income buyers purchasing in designated rural and suburban locales. Offered by the United States Department of Agriculture (USDA), these mortgages promote affordable housing and community development.
To be eligible for a USDA loan, you must meet these primary criteria:
- Your household income cannot exceed the income limit for your area (typically 115% of the median income)
- You must have a credit score of at least 640
- The property must be located in an eligible rural zone as designated by the USDA property eligibility tool
In addition to income and location constraints, your total debt-to-income ratio can be no higher than 41% for a USDA loan.
USDA does not require a down payment or PMI. First-time homebuyers may also qualify for down payment assistance programs in conjunction with the loan.
Comparing Credit Requirements
When it comes to credit, VA and USDA loans take slightly different approaches.
VA Loans
- No defined minimum credit score
- Most lenders look for 620+ FICO score
- Entire credit profile reviewed including ratios, income, and residuals
USDA Loans
- Minimum 640 credit score
- Must have a 41% or lower debt-to-income ratio
So while both programs offer credit flexibility, USDA guidelines are a bit stricter regarding your score and debt ratio maximums. VA takes a more holistic look at your overall creditworthiness.
Evaluating Income Limits
One major difference between VA and USDA loans is the treatment of income limits.
VA Loan Income
- No maximum income limits
- Qualify based on credit, assets, and overall financial profile
USDA Loan Income
- Must be below 115% of area median income
- Varies by location and household size
- Designed for low-to-moderate income borrowers
VA loans place no caps on how much income you can earn and still qualify. USDA loans do have maximums in place to ensure the program serves the target demographic.
Use the USDA income limit tool to see if your income falls below the threshold for the area where you want to buy. VA applicants need not be concerned with income caps.
Comparing Down Payments
A major benefit of both VA and USDA loans is the ability to buy with no down payment.
- Neither program requires a down payment
- 100% financing available if you qualify
- No need for private mortgage insurance (PMI)
This “zero-down” feature makes these government-backed loans more accessible, especially for first-time buyers without substantial cash reserves.
While down payments are not mandatory for VA or USDA borrowers, you may still choose to make one. This reduces the amount you need to finance and can lower your interest rate. Just know that down payments are optional.
Property and Occupancy Requirements
VA and USDA loans have different property eligibility guidelines tied to location and occupancy.
VA Loan Property Rules
- No restrictions on property location
- Must be a single-family residence, condo, townhome, or manufactured home
- Borrower must occupy the home as primary residence
USDA Loan Property Rules
- Home must be in an eligible rural area as designated by USDA mapping tool
- Single family homes, condos, townhomes, manufactured homes allowed
- Must be borrower’s primary residence
- Properties must meet USDA minimum quality standards
VA loans are more flexible in terms of location – you can buy anywhere in the U.S. regardless of area. USDA restricts eligible homes to approved rural locales only. Both require you live in the home as your primary residence.
Comparing Loan Fees
VA and USDA loans come with certain upfront fees and ongoing costs you should factor in.
VA Loan Fees
- VA funding fee (upfront fee of 2.3% – 3.6% of loan amount)
- Can be rolled into loan amount or paid upfront
- Exemptions available for disabled Veterans and other borrowers
USDA Loan Fees
- Upfront guarantee fee (1% of the loan amount)
- Annual fee of 0.35% of loan amount each month
- Fees cannot be waived or exempted for any borrowers
Calculate these fees into your total loan costs, and consider if an exemption may apply in the case of a VA loan. USDA fees are set requirements.
Understanding Loan Limits
When it comes to maximum loan amounts, VA and USDA have different limitations to be aware of.
VA Loan Limits
- No limit for Veterans with full entitlement
- Caps apply to previously used entitlement
- Maximums vary by county – VA has lookup tool
USDA Loan Limits
- Vary based on income, location, and household size
- Talk to USDA lender to confirm your maximum amount
In most cases for first-time VA borrowers, you can qualify for any loan amount a lender approves. USDA sets defined limits tied to your specific situation. Consult with lenders to clarify the caps for each loan program.
Which Loan is Right for You?
Choosing between a VA or USDA loan depends on your individual needs and qualifications.
Consider USDA If:
- Your income falls under set limits for area median income
- You want to buy a home in a rural/suburban zone
- You meet minimum credit score and debt ratio requirements
Consider VA If:
- You are a Veteran, service member, or surviving spouse
- Your income exceeds USDA limits
- You want flexibility buying in any location
- You have lower credit scores or higher debt ratios
Take time to evaluate your specific financials, home preferences, and lifestyle needs when deciding between these two government-backed mortgages. An experienced loan officer can also provide guidance on the optimal loan choice for your situation.
Work with a Trusted Lender
Completing a VA or USDA loan application requires organizing extensive documentation and navigating complex guidelines. Rely on a reputable lender to streamline the process and optimize your chances for approval.
As the nation’s largest and most experienced VA lender, Veterans United has helped over 1 million military borrowers achieve homeownership. Our USDA loan specialists also excel in securing loan approval for eligible applicants.
By working with an established lender, you benefit from:
- Simple online applications
- Fast pre-approvals
- Expert support throughout the entire loan process
Don’t leave your home loan to chance. Partner with dedicated VA/USDA loan professionals to turn your dream of owning a home into reality.
Frequently Asked Questions
Can I get a VA loan and USDA loan?
You can only have one of these loans at a time. If eligible for both, compare to see which offers the best rates and terms for your situation.
What credit score is needed for USDA loan?
The minimum FICO credit score for USDA loans is typically 640. Some lenders may approve scores slightly below this threshold with strong compensating factors.
Do USDA loans have income limits?
Yes, you must have an income below 115% of the median income for your area and family size. VA loans have no income limits.
**Can
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