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 an eligible homebuyer looking to purchase a home with no down payment, VA loans and USDA loans are two excellent options to consider Both loan types offer 100% financing and flexible credit requirements that can help make homeownership more accessible
When choosing between a VA loan or USDA loan, there are some key factors to weigh based on your personal financial situation and goals. In this comprehensive guide, we’ll compare VA loans and USDA loans to help you determine which mortgage better fits your needs.
Overview of VA Loans and USDA Loans
First, let’s look at some background on each loan type.
What is a VA Loan?
VA loans are backed by the Department of Veterans Affairs and available exclusively to military members and veterans. Some spouses of deceased veterans may also qualify.
With a VA loan, eligible borrowers can purchase a home with no down payment. VA loans also offer competitive interest rates and smaller monthly mortgage insurance premiums compared to other loan types.
Over 2 million VA loans have been issued to date, making it a popular choice among eligible service members.
What is a USDA Loan?
USDA loans are issued by private lenders but guaranteed by the United States Department of Agriculture. They help low-to-moderate income buyers purchase homes in rural and suburban locations.
Like VA loans, USDA loans require no down payment. They also have flexible credit requirements. USDA loans are only available for primary residences.
While not as widely used as VA loans, USDA mortgages can be an excellent option for eligible borrowers in rural communities. Over 23,000 USDA loans were issued last year.
Key Differences Between VA Loans and USDA Loans
VA and USDA loans share some common perks but have distinct differences when it comes to eligibility requirements, loan limits, and more.
Here is an overview of how the two loans compare:
Eligibility
VA loans are for veterans, active-duty service members, reservists, National Guard members, and some military spouses. No occupancy or location restrictions.
USDA loans are for low-to-moderate income borrowers purchasing in rural and suburban areas. Occupancy as primary residence required.
Loan Limits
No loan limits for VA borrowers with full entitlement. VA jumbo loans available.
USDA bases loan amounts on income, assets, and property location. No set limits.
Credit Score Requirements
VA loans typically require 620+ credit score. No set minimum score.
USDA lenders generally look for 640+ credit score. No set minimum.
Income Limits
No income limits on VA loans. Based on debt-to-income ratio.
USDA has maximum income limits based on property location.
Interest Rates
VA loan rates are very competitive, just above conventional loans.
USDA loan rates are competitive for low-income borrowers but can be higher.
Loan Fees
VA funding fee added to loan amount. No monthly mortgage insurance.
Upfront guarantee fee and annual fee for USDA loans.
Property Types
VA loans available for single family homes, townhomes, condos etc. Up to 4 units.
USDA restricted to single family homes in rural/suburban areas.
VA Loan Benefits and Drawbacks
VA loans offer excellent benefits like no down payment and flexible underwriting. However, you need to meet military service requirements to qualify.
Pros of VA Loans
- Available with 0% down
- No mortgage insurance premiums
- Competitive interest rates
- No income or purchase price limits
- Low credit score requirements
- Allows co-borrowers to reduce DTI
Potential Cons
- Must meet military service requirements
- VA funding fee added to loan amount
- Not ideal for luxury/jumbo loans
- Refinancing requires seasoning of 210+ days
The main advantage of VA loans is that they provide 100% financing options for military families. For eligible borrowers, it’s hard to beat the perks and affordability of a VA mortgage.
However, non-military buyers won’t qualify. And while very flexible, VA loan fees and requirements like loan seasoning make it less suited for certain borrowers.
USDA Loan Benefits and Drawbacks
USDA loans help low-to-moderate income buyers in rural areas realize the dream of homeownership. However, strict income and location requirements limit eligibility.
Pros of USDA Loans
- 100% financing, no down payment
- Available to non-military borrowers
- Competitive rates for low-income buyers
- Lower minimum credit scores
- Income limit flexibilities for some areas
Potential Cons
- Strict income and property eligibility rules
- Rates less competitive for higher earners
- Upfront and annual mortgage insurance fees
- Not available in nonrural locations
- Limited to single family primary residences
USDA loans fill an important niche by serving rural buyers who may not qualify for other 100% financing programs. But limitations on property location and borrower income make them unsuitable for many buyers.
For eligible applicants, though, USDA loans can help make buying a home a reality when other loan options are out of reach. The Pros outweigh the Cons for many.
How to Choose: VA Loan vs. USDA Loan
When deciding between a VA or USDA loan, first look at your eligibility. From there, compare costs and requirements to see which option makes more financial sense for your situation.
If you qualify for both loans, consider:
- Your income – No limits on VA loans. USDA capped at 115% of median income.
- Loan costs – VA has funding fee, USDA has upfront and annual MI fee.
- Rates & fees – Get quotes to compare. VA may offer lower rates for higher earners.
- Property location – USDA has rural restrictions, VA does not.
- Maximum loan amount – No limit on VA loans. USDA loan maximums vary.
- Credit score requirements – Check if you meet lender minimums for both programs.
Look closely at the loan features, fees, and eligibility criteria for both programs. Think about your financial goals, home preferences, and where you hope to live.
Crunch the numbers to see if the VA or USDA loan results in lower costs overall. Choosing the right loan can lead to thousands in long-term savings.
Next Steps to Apply
Ready to move forward with a no-down-payment VA or USDA mortgage? Here are some next steps:
- Get pre-approved – This shows sellers you’re serious and can identify issues early.
- Check VA entitlement – Maximize your benefit if purchasing with VA loan.
- Request rate quotes – Compare total costs between VA, USDA, and other loans.
- Find a property – Start touring homes once pre-approved.
- Make an offer – Submit a competitive bid with your agent.
- Get an appraisal – Ensures home meets program requirements.
- Close on time – Set a closing date and work with your lender to finalize loan.
The mortgage process can seem daunting. But taking it one step at a time will get you to closing day! With a disciplined approach, you can secure a VA or USDA loan to purchase your dream home.
FAQs About VA Loans vs. USDA Loans
Do VA loans or USDA loans offer lower rates?
For most borrowers, VA loans offer lower interest rates than USDA loans. However, USDA loans can provide below-market rates for very low-income buyers in certain situations.
Can I use a USDA or VA loan for a second home?
No. Both VA and USDA loans must be used to purchase or refinance a primary residence. They cannot finance second homes or investment properties.
Which is easier to qualify for, a VA loan or USDA loan?
VA loans typically have easier credit and income requirements. More buyers will qualify for a VA loan given the broader eligibility guidelines.
Do USDA loans work for manufactured homes?
Yes. Like VA loans, USDA mortgages can finance the purchase of manufactured or mobile homes if they meet certain requirements.
Are VA or USDA renovation loans available?
Yes. Both VA and USDA offer specialty loan programs to finance home repairs or renovations along with a purchase or refinance.
Choosing the Best Loan for You
VA and USDA loans both offer great benefits that can help you buy a home with minimal cash. But each mortgage has limitations too. Analyze your specific situation to decide if a VA, USDA, or conventional loan is the optimal choice.
While military status is required for VA loans, income caps restrict USDA mortgages. But either loan can be a game changer if you qualify. Do your homework to select the ideal government-backed mortgage for you and your finances.
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.
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.