If you are looking for a low down payment home loan opportunity, both the USDA and FHA loans offer worthwhile options.
Not everyone will qualify for both loans, but eligible buyers may be able to purchase a new home with as little as 3.5% down — or even no down payment at all.
Below, we explore the requirements for each loan type.
Is a USDA or FHA loan better?
Neither home loan option is inherently better than the other. The best loan option for you will depend on the specifics of your eligibility, home buying goals, and personal financial situation.
Generally speaking, FHA loans are a more flexible lending solution for buyers with lower credit scores or less cash available for a down payment. USDA loans have income limits and location restrictions to consider before applying and are designed to help rural or suburban borrowers become homeowners.
USDA vs FHA loans for first-time home buyers
As a first-time homebuyer, the right choice between the USDA and FHA loan will vary based on your situation.
For many first-time home buyers, especially low-income families, saving up for the down payment is the biggest hurdle. After all, it can be a challenge to put aside a substantial amount of cash without life getting in the way.
If you qualify for a USDA loan, you won’t have to put any money down at all. The USDA loan is a zero-down loan. This can be a great opportunity but you’ll need to meet specific income and location standards to take advantage of it. Buyers must be in a USDA-designated “rural area” to be eligible for this program. You can check a property’s eligibility using this tool.
Since not everyone can qualify for the USDA loan and its zero down payment opportunity, the good news is that the FHA loan offers a low down payment option. It’s possible to put down as little as 3.5% with this home loan.
In either case, you’ll find a relatively affordable pathway to homeownership.
USDA vs FHA eligibility
FHA loan requirements
The FHA loan program is backed by the U.S. Department of Housing and Urban Development (HUD) through the Federal Housing Administration (FHA). This mortgage program is intended to help people with fair credit and modest savings become homeowners more easily.
In order to qualify for an FHA loan for your home purchase, you’ll need to meet the following requirements:
- Down payment: You’ll need to put down at least 3.5% if you have a credit score of at least 580. But the minimum down payment requirement increases to 10% if you have a credit score between 500 and 579.
- Sufficient income: The FHA requires you to prove sufficient income to support your monthly payments.
- Low debt-to-income ratio (DTI): Lenders look at your DTI to determine how much of your income is already dedicated to debt payments. FHA lenders often require a DTI of 45% or lower but may go as high as 50% in certain cases
- Loan limits: As of 2023, most areas have a maximum loan amount of $472,030. But some high-cost areas have higher loan limits for FHA borrowers. Remember, this is the loan limit, not the purchase price limit.
- Property types: You can purchase a property with up to four units as a primary residence with an FHA loan.
USDA loan requirements
The USDA loan is backed by the U.S. Department of Agriculture with the goal of helping rural families obtain affordable homeownership.
Households that meet the following requirements could qualify for a USDA loan:
- Location restrictions: Not all properties qualify for USDA loans. Instead, only rural areas qualify. Here’s where you can find out if a property you have in mind qualifies for USDA loans. Additionally, the property must be a single-family home.
- Income limits: Your household’s income cannot exceed 115% of the area’s median income. Use this tool to find out the income limits for your county. And of course, you’ll need enough income to cover your monthly mortgage payment.
- Low debt-to-income ratio (DTI): Most USDA lenders require a DTI of 41% or lower.
- Credit score: Although the USDA doesn’t set a specific credit score limit, most mortgage lenders require a 640 credit score. Additionally, you won’t want an adverse credit history that includes foreclosures or late credit card payments on your application for this homeownership program.
- Primary residency: USDA loans are a great mortgage option for those looking for a primary residence. If you are looking for a second home, you won’t qualify for a USDA mortgage. Additionally, only single-family homes are allowed.
USDA vs FHA vs conventional
Both USDA and FHA loans are government-backed options. That government backing provides extra assurance to private lenders, which in turn means it’s easier for borrowers to qualify who might not be eligible for a conventional loan. That includes buyers with lower incomes or less established credit histories.
With both the USDA and FHA programs, you’ll find low-down payment options and relatively flexible credit score requirements. However, both low-income mortgage loan types will require upfront and monthly mortgage insurance payments regardless of your down payment amount.
However, there are conventional loan programs that will also allow you to make a low down payment, sometimes as little as 3%. The credit requirements will be stricter but with the added benefit that mortgage insurance can be canceled when you accrue 20% equity.
Other homeownership programs with low down payment requirements to consider include:
- VA loans, backed by the U.S. Department of Veterans Affairs for veterans and active-duty service members
- HomeReady by Fannie Mae, which require a down payment of as little as 3%
- HomePossible by Freddie Mac, which also requires a down payment of just 3%
Additionally, many states and nonprofits offer housing programs and down payment assistance programs to help you achieve your real estate ownership goals.
FHA pros and cons
Every mortgage product has advantages and disadvantages. Here’s what to know about FHA loans.
|Minimum down payment is 3.5%||Some down payment required|
|Flexible credit requirements||Relatively high mortgage insurance premiums|
|Multi-family properties allowed||Loan limits based on your location|
USDA pros and cons
Of course, the USDA loan also has some benefits and flaws to consider. Here’s what to know about USDA loans.
|No down payment required||Location restrictions|
|Lower mortgage insurance costs||Income gaps|
|The seller can cover closing costs||Higher credit score requirements|
USDA vs FHA FAQ
Is it easier to get an FHA or USDA loan?
Both mortgage programs can offer a more accessible homebuying process than conventional loans. In general, the FHA loan is considered a more flexible loan opportunity thanks to its lenient credit score requirements. However, if you live in the right location and don’t have a down payment, a USDA loan can put homeownership within reach.
Is a USDA loan cheaper than an FHA loan?
The lack of a down payment requirement makes a USDA loan a more affordable option upfront. Additionally, because they carry lower mortgage insurance rates, USDA loans are often an overall more affordable option than FHA loans for buyers who qualify.
What is the downside to a USDA loan?
The biggest downside to USDA loans is the location restrictions. If you aren’t planning to live in a rural location, then a USDA loan is off the table for your homeownership needs. Additionally, the program is specifically designed for low-income home loans. To qualify, your household income must not exceed limits for your geographical area. You can check limits for your county here.
Why would a seller not want a USDA loan?
A seller might not want a USDA loan because the property must meet certain livability thresholds. The property must have adequate utilities and provide a safe environment for its occupants. Additionally, the property must connect to a public road.
What credit score do you need for a USDA loan?
The USDA doesn’t set specific credit score requirements for USDA loans. However, most lenders require a credit score of at least 640 to issue a USDA loan to future homeowners.
Do USDA loans require home buyer education courses?
Yes, the USDA requires that first-time home buyers complete a home buyer education course.
Bottom line: USDA vs FHA loans
USDA loans and FHA loans are both designed to help those with lower income pursue their homeownership goals. If you qualify for one or the other, homeownership might be within reach.