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USDA vs. FHA loan: Key differences and how to choose

Yahoo Personal Finance· Getty Images
Updated 9 min read

The American dream of owning a house with a white picket fence is feeling increasingly unattainable due to the ongoing rise in home prices. This is especially true for aspiring homeowners with less-than-perfect credit scores or low incomes who struggle to qualify for conventional home loans to finance their home purchases. Thankfully, government-backed mortgages like FHA and USDA loans offer a more accessible path to homeownership.

Here’s everything you need to know about USDA versus FHA loans to help you decide which makes more sense for your location, family, and finances.

In this article:

Read more: When will housing prices drop?

FHA and USDA loans are two types of mortgage loans insured by the Federal Housing Administration (FHA) and the U.S. Department of Agriculture (USDA), respectively. This means mortgage lenders are protected against loss if you default on your loan.

FHA loans are known for their lenient credit score and low down payment requirements, making them a popular option for first-time home buyers or people who aren’t eligible for conventional loans due to poor credit.

USDA loans are specifically designed for borrowers with low-to-moderate incomes who want to buy homes in rural areas. Though these home loans don't require a down payment, many mortgage lenders require a minimum credit score of 640.

You can apply for FHA loans with FHA-approved lenders. Visit the HUD website to search for one. USDA-approved lenders can be found on USDA’s website.

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USDA and FHA loans are run by two separate government agencies, so it makes sense that they have different application, underwriting, credit score, down payment, and mortgage insurance requirements.

The entire application and underwriting process for FHA loans typically takes about 30 to 45 days, though it can be faster depending on how quickly you provide the necessary documentation.

Generally, you can also expect your USDA loan to close within 30 to 45 days. But the application and underwriting process might take longer than FHA loans since the USDA could have to review the lender’s underwriting under certain circumstances. Your application may also undergo manual underwriting if your credit score is under 640, which could drag out the process.

USDA home loans are pretty strict about your income since they are designed for low-to-moderate-income households. This income limit depends on the location of the property and the number of people in your household. Check the income limits for the county where you plan to buy your home to see if you’re eligible.

Unlike USDA loans, FHA loans don’t have income limits. However, most lenders will ask you to prove your income to show you can afford the monthly mortgage payments.

Learn more: Best FHA lenders of 2024

The lowest credit score you can qualify for an FHA loan with is 500, though you’ll need to come up with a 10% down payment. If your credit score is 580 or higher, you only need to put 3.5% down.

Unlike the FHA, the USDA doesn’t set a minimum credit score to buy a house — but your USDA lender might. Most lenders prefer a FICO score of at least 640 with USDA loans. But it’s still worth shopping around if you have a lower score because every lender has its own preferences.

USDA and FHA loans both usually have lower interest rates than conventional loans. They’re backed by government agencies, which makes them less risky for lenders. Less risk usually leads to a lower mortgage rate.

According to Freddie Mac, the 30-year fixed-rate FHA mortgage rate is approximately 6.65% as of mid-June 2024. The 30-year fixed-rate USDA mortgage rate is around 6.66%. For context, the interest rate on a 30-year fixed-rate conventional mortgage has been hovering around 7%.

Learn more: 5 strategies for getting the lowest mortgage rates

With an FHA loan, you only have to put 3.5% down if your credit score is 580 or higher. If your credit score falls between 500 and 579, you'll need to come up with a 10% down payment.

USDA loans don’t require any down payments, which is one of the many perks of this type of mortgage.

With FHA loans, you’ll pay mortgage insurance premiums (MIPs) for the entire life of your loan. If you put 10% or more down, though, your MIP will fall off after 11 years. FHA mortgage insurance consists of two parts: the up-front mortgage payment, which is 1.75% of your mortgage principal, and the annual MIP, which depends on various factors.

USDA loans don’t technically come with mortgage insurance, but you’ll need to pay what’s known as a USDA guarantee fee (similar to mortgage insurance) at closing and each month for the life of your loan. You’ll pay around 1% of your total loan amount at closing. The annual fee is 0.35% of your outstanding principal balance, which is divided by 12 and included in your monthly payment.

The 2024 FHA loan limit for a one-unit property in a low-cost area is $498,257. The FHA loan limit may be up to $1,149,825 for a one-unit home in high-cost areas. The limit is $1,724,725 in Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

The 2024 USDA loan limit in most areas is $398,600, but it can be higher in more expensive places. Like FHA loans, these loan limits vary depending on where you live. Consider your borrowing limits when thinking about the purchase price of a home you want to buy.

A home appraisal is required for both FHA and USDA loans. For an FHA loan, the appraiser must determine the property's current market value and ensure that the home meets FHA standards for health and safety.

A USDA appraisal also has special requirements. The appraiser must confirm the property is properly valued, habitable, and in a USDA-determined rural area.

Learn more: Best USDA mortgage lenders

FHA loans are known to be more forgiving and less restrictive than other home loan options, but FHA loans come with pros and cons.

  • Low down payment requirement. If you have a credit score of 580 or higher, you only need to put 3.5% down with an FHA loan. If your score is in the 500 to 579 range, the down payment requirement is 10%.

  • Lenient eligibility requirements. Conventional loans usually require a minimum 620 credit score and a debt-to-income ratio of 45% or less. But you can qualify for an FHA loan with a credit score as low as 500 and a DTI ratio of 43% or less.

  • Availability for multifamily homes. You can use an FHA loan to finance multiple types of properties, including single-family homes, condos, and multifamily homes with up to four units.

Learn more: What are the requirements for an FHA loan?

  • Mortgage insurance premium. Though you don’t have to put much down with FHA loans, you must pay a mortgage insurance premium. Though it’s possible to remove FHA mortgage insurance, your options are limited.

  • Low loan limits. In 2024, the borrowing limit for FHA-backed loans for a single-unit home is $498,257 in most parts of the United States. There are exceptions, though — the limits vary depending on the county where the house is located and are typically lower in low-cost areas.

  • Owner-occupied homes only. You can only use FHA loans for owner-occupied properties. This means second homes and investment properties are not eligible.

Read more: How to buy a second home

Like FHA loans, USDA loans also come with perks and downsides. Here are a few to consider.

  • No down payment requirement. Perhaps the biggest perk of taking out a USDA loan is that you can finance up to 100% of a home's appraised value. This also means that no down payment is required.

  • Low interest rate. Since USDA loans are backed by the government, mortgage lenders can keep the interest rates low since they assume less risk.

  • Low insurance cost. The USDA mortgage guarantee fee costs 1% of your loan at closing and 0.35% of the remaining balance each year — a bit cheaper than the mortgage insurance premium on FHA loans.

  • Primary residences only. Like FHA loans, you can only use USDA loans to finance primary residences, not investment properties or second homes.

  • Household income restrictions. USDA loans are designed to help low-to-moderate-income buyers find homes, so if you make too much money, you won’t qualify.

  • Location requirements. Your home must be in a rural part of the country to be eligible for USDA financing. So, if you want to purchase a property in a major city like Manhattan, USDA loans aren’t for you.

It depends. An FHA loan may be better if you have some money saved up for a down payment but lack the credit score to qualify for a decent interest rate on a conventional loan. It’s also a more suitable choice if you don’t want to deal with the USDA restrictions on where you can live.

However, a USDA loan may make more sense if you fall into the middle-to-lower income group, don’t have money for a down payment, and are looking to buy in somewhat rural areas.

Qualifying for an FHA loan is typically easier than a USDA loan due to the FHA’s lenient credit score requirements. Plus, FHA loans are available to almost everyone, with no minimum or maximum income limits. USDA loans are only for low-to-moderate-income buyers, so you won’t qualify if you earn too much.

FHA scores require a minimum 580 credit score with a 3.5% down payment or 500 to 579 with 10% down. The U.S. Department of Agriculture doesn’t set a minimum credit score for USDA loans, but many lenders want a score of at least 640.

Yes, you can refinance out of a USDA loan into another type of mortgage, including conventional loans, as long as you meet the eligibility criteria. The process is no different from most mortgage refinances, which typically involve applying with the lender, undergoing a credit check, and getting a home appraisal.

This article was edited by Laura Grace Tarpley