October 22, 2021
  • October 22, 2021

USDA vs FHA Loans: What’s the Difference?

By on October 5, 2021 0

Our goal is to give you the tools and the confidence you need to improve your finances. While we do receive compensation from our partner lenders, whom we will always identify, all opinions are ours. Credible Operations, Inc. NMLS # 1681276, is referred to herein as “Credible”.

Mortgages from the United States Department of Agriculture (USDA) and the Federal Housing Administration (FHA) are generally easier to obtain than a conventional mortgage. This makes them good options for first-time home buyers and low to moderate income borrowers.

Although both of these loans are guaranteed by government agencies, there are several key differences between the two that you will need to consider before applying for one. For example, USDA loans require you to live in a rural setting and meet the income limit for your area.

Here’s a closer look at each loan program so you can decide which one is best for your needs:

USDA eligibility against FHA

Both the USDA and the FHA offer home loans for single family residences.

For an FHA loan, you will apply for a 203 (b) base mortgage to purchase your primary residence.

However, there are two USDA home loan programs to choose from and the eligibility standards are slightly different:

  • USDA Guaranteed Loan: For low to moderate income households that a private lender issues but USDA supports. You will not have any borrowing limit or ownership restrictions for this loan.
  • USDA Direct Loan: For low and very low income borrowers who need additional underwriting. The USDA funds the loan and it has more stringent income and ownership criteria. Also, the borrowing limit is $ 285,000 in most counties.

Here are the basic requirements that you will need to meet for each loan:

USDA loans FHA loans
Min. advance payment 0%
  • 3.5% (with a credit score of 580 or higher)
  • ten% (with a credit score between 500 and 579)
Min. credit rating 640 500
Income Limits Up to 115% of median household income Nothing
Debt-to-income ratio (DTI)
  • Up to 29% of monthly housing costs
  • Up to 41% of monthly debt payments
  • Up to 31% of monthly housing costs
  • Up to 43% of monthly debt payments
Loan limits
  • None for secured loans
  • Up to $ 285,000 for most direct loans
$ 356,362 for single-family homes in most areas
Location requirements USDA eligible rural areas only Nothing
Types of eligible properties Single-family main residences only Main residences between 1 and 4 apartments
Mortgage repayment terms 30 years fixed 30-year fixed rate, 15-year fixed rate and adjustable rate
Upfront costs 1% guarantee fee Initial mortgage insurance premium of 1.75%
Annual subscription 0.35% annual fee Up to 0.85% annual mortgage loan insurance premium

See also: Conventional loan conditions

USDA home loans have stricter income limits than FHA loans and also require you to live in an eligible rural area. Your home address and your annual household income determine your borrower’s eligibility for USDA loans.

The requirements of FHA borrowers, on the other hand, are more lenient because you may have a lower credit score. Multi-unit buildings are also eligible. However, you will need to make a down payment with an FHA loan.

USDA vs FHA vs conventional

Many home buyers will use a USDA, FHA, or conventional mortgage to purchase their home. Here is how these three types of loans differ.

USDA loans

These loans are only available to low to moderate income rural home buyers. Income limits vary by region but are relatively strict. USDA loans do not require a down payment, but you will need a minimum credit score of 640 and will be required to pay an upfront guarantee fee of 1% plus an annual fee equal to 0.35% of the amount. your loan.

FHA loans

Among government mortgage programs, you may have the easiest time qualifying for an FHA loan. You will only need a 3.5% down payment when your credit score is at least 580.

That said, you will likely be paying mortgage insurance for the life of the loan, unless you can deposit at least 10%. This allows you to forfeit your remaining payments after 11 years.

Conventional loans

Conventional mortgages have the strictest credit requirements, but they also offer competitive rates and can end up being cheaper in the long run. For example, you can avoid private mortgage insurance with a minimum down payment of 20%.

Credible does not offer FHA or USDA loans, but we can help you find a great rate on a conventional loan. Just enter some basic financial information and you’ll see multiple prequalified rates within minutes. After that, you can explore your loan options and find the one that best fits your budget.

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  • Instant simplified pre-approval: It only takes 3 minutes to see if you qualify for an instant streamlined pre-approval letter, without affecting your credit.
  • We keep your data private: Compare rates from multiple lenders without your data being sold or spammed.
  • A modern approach to mortgage loans: Top up your mortgage online with banking integrations and automatic updates. Only speak to a loan officer if you want to.

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Pros and Cons of USDA

USDA loans offer several advantages to borrowers, but there are some disadvantages that you should also consider.

Benefits of USDA

Here are some of the best reasons to consider a USDA loan:

  • No minimum deposit: Conventional loans and FHA loans both require some form of down payment, but USDA loans do not have such a requirement.
  • May not need cash reserves: Lenders may not require cash reserves to secure funding. However, including your qualifying balances may facilitate eligibility.
  • No maximum purchase price defined: USDA loans have no borrowing limit. Instead, the maximum amount of your loan depends on your repayment capacity.
  • Lower mortgage insurance costs: Your initial USDA guarantee fee is 1% of the loan amount and the annual fee is 0.35%. Both rates are lower than the FHA mortgage insurance premiums.
  • The seller can pay the closing costs: The seller can contribute up to 6% of the sale price. You can also receive unlimited gift funds to reduce your loan amount.

Disadvantages of USDA

Here are the main disadvantages of this loan program:

  • Good credit required: You will need a minimum credit score of 640 to be eligible for this loan, similar to conventional lenders. FHA lenders may only require a score of 580 or less.
  • Geographical restrictions: You must live in a rural area to be eligible for USDA funding. Fortunately, the definition is flexible, and many suburban and dormitory communities may be eligible if the population is below a certain amount.
  • Maximum income limits: For a USDA guaranteed loan, your household income cannot exceed 115% of your county’s Median Household Income (MHI). Households with incomes 80% below the MHI will need to apply for a USDA direct loan. Direct loans may have more stringent ownership and application requirements, but like secured loans, they do not require a down payment.
  • Lifetime Warranty Fee: All USDA loans require an upfront and annual guarantee fee for the life of the loan. Unlike FHA and conventional loans, making a qualifying down payment will not affect whether or not you pay for mortgage insurance.
  • Single-family homes only: Single-family homes are the only type of qualifying property. This includes townhouses and condos, as long as you use the unit for your primary residence. Investment properties are not eligible.

Pros and Cons of FHA

FHA loans are a good option, especially if you have poor credit or a lot of debt. But they also come with their own set of drawbacks.

The FHA pros

Here are some of the best reasons to apply for an FHA home loan:

  • Favorable credit conditions: You can usually qualify for maximum FHA financing with a credit score of 580 versus a score of 640 for a USDA loan. You might also qualify with a credit score between 500 and 579 if you can make a 10% down payment.
  • Higher debt-to-income ratios: Your back-end DTI, that is, your total monthly debt, can reach 45% for FHA loans, but only 41% for USDA loans.
  • Potentially lower interest rate: FHA interest rates may be lower than USDA loan rates because you have the option of choosing shorter repayment terms, including a 15-year fixed interest rate. The USDA only offers fixed 30-year loans, which naturally have higher rates.
  • Multi-family units may be eligible: Properties with up to four units may qualify for financing with an FHA loan when one unit is your primary residence. For example, buying a duplex with an FHA loan is ok as long as you live in half the property. Like USDA loans, however, second homes and investment properties are not eligible.

Disadvantages of FHA

  • Higher down payment terms: Depending on your credit score, you will need to make a down payment of 3.5% or 10%. USDA loans do not require a down payment.
  • Higher mortgage insurance premiums: Your initial and annual mortgage insurance premiums are higher than the USDA warranty fee and annual fee.
  • Difficult to cancel mortgage insurance: You will pay an annual mortgage loan insurance premium over the life of the loan, unless your down payment is 10% or more, in which case you will only pay mortgage default insurance for the first 11 years.
  • Mortgage limits: The maximum loan amount in 2021 is $ 356,362 for most counties. You may qualify for a higher limit if you live in a high cost area.

Keep reading: FHA vs. Conventional loans: which one is right for you?

About the Author

Josh Patoka

Josh Patoka is an authority on personal finance and a contributor to Credible. His work has been published on Fox Business and several award-winning personal finance blogs, including Well Kept Wallet, Wallet Hacks, and Frugal Rules.

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