USDA vs. FHA Loans: Which One Fits Your Dream Home?
If you have a low to moderate household income and want to purchase a home, you may be comparing a USDA loan vs. FHA loan.
These loan products have more relaxed lending requirements than conventional loans. This means you’ll have a better chance of approval even if your credit score isn’t ideal and you don’t have a large down payment saved up.
However, you might find that one offers more benefits than the other.
Introduction: USDA vs. FHA Loans – What You Need to Know
There is one significant difference between USDA and FHA loans. Each loan type is geared toward different kinds of homebuyers.
USDA loans are sponsored by the United States Department of Agriculture and are only available to those with incomes below 115% of the median in their area. Additionally, USDA loans require no down payment but are only available if you purchase a home in a rural area.
FHA loans are slightly different. They’re backed by the Federal Housing Administration, and they’re available with no income limits. Plus, FHA loans have easier lending requirements. You can be approved for an FHA loan with a credit score as low as 500.
Although FHA and USDA loans have some differences, they have one significant similarity. Both help make homeownership possible for people who might not qualify for conventional loans.
Eligibility and Requirements: USDA vs. FHA Loans
Here’s a breakdown of the eligibility guidelines for both loan types.
USDA Loans
USDA loans were designed to help lower-income households purchase homes in rural areas of the United States. To use a USDA loan, borrowers must purchase in a USDA-defined location and have an income below the USDA limits.
Income: To qualify for a USDA loan, your household income must be below 115% of the median income in your area.
Credit Score: The USDA does not have any credit score requirements. However, some lenders might require borrowers to have a credit score of at least 640.
Debt-to-Income Ratio: Your debt-to-income ratio (DTI) compares how much you spend on debt each month to your monthly income. Most USDA loan lenders will require a DTI of 41% or below.
Down Payment: There is no down payment requirement for USDA loans.
FHA Loans
While it’s not required, FHA loans are often used by first-time homebuyers. These loans are usually used by low-to-middle-income households and are more forgiving in terms of credit score.
Income: There are no income limits for FHA loans.
Debt-to-Income Ratio: FHA borrower can often be approved using 40% of their income toward housing and 50% toward housing plus all other debt payments. Maximum DTI depends on the strength or the rest of the file.
Down Payment: FHA borrowers can use a down payment as low as 3.5% for credit scores of at least 580. Those with credit scores between 500 and 579 will need a down payment of 10%.
Key Differences Between USDA and FHA Loans
When choosing between a USDA and FHA loan, your decision will likely be based on which loan you qualify for. Let’s look further into some of the differences.
Location Constraints
The most significant difference between a USDA loan and an FHA loan is the location of the house you’re looking to buy. USDA loans require the home you’re purchasing to be within a USDA-eligible area. Here is a map to pinpoint a specific address or peruse an area.
If you’re purchasing in a non-USDA-eligible area, an FHA loan is a great option because it has no location requirements.
Income Limits
USDA loans are only available if your income falls below 115% of the median income in your area with a base of $112,450 for all areas in 2024-2025 (income limits change mid-year). If your household income is above this threshold, you’ll need to look into an FHA loan which has no income requirements. Here’s a guide to find income limits in your area.
Down Payment Requirements
One big perk of a USDA loan is that there are no down payment requirements. This helps people with lower incomes afford homeownership.
On the other hand, FHA loans require a down payment of at least 3.5% (as long as your credit score is at least 580). If your credit score is between 500 and 579, you can still qualify for an FHA loan, but you will need a down payment of at least 10%.
Mortgage Insurance
USDA and FHA loans both require you to pay mortgage insurance, but different amounts.
USDA loans require an upfront guarantee fee (its version of mortgage insurance) of 1% of the loan amount, which can be paid at closing or rolled into the loan. Additionally, USDA loans require an annual 0.35% mortgage insurance, which equates to about $29 per month per $100,000 borrowed.
Upfront FHA mortgage insurance is 1.75% of the loan amount. Like a USDA loan, this can be paid at closing or rolled into your loan amount. In addition, the annual mortgage insurance premium is usually 0.55% of the loan per year, or $46 per month per $100,000 borrowed.
Feature | USDA Loan | FHA Loan |
Down Payment | No down payment required | 3.5% (credit score of 580+), 10% (credit score of 500-579) |
Location Requirement | The house must be in a USDA-eligible location | Nationwide |
Income Limits | 115% of the area’s median income | No income limits |
Mortgage Insurance | 1% upfront fee and $29 per month per $100,000 in loan amount | 1.75% upfront fee and usually $46 per month per $100,000 borrowed |
Credit Score Requirements | No credit score requirements by the USDA. However, most lenders require 640 | 500 for 10% down 580 for 3.5% down |
Loan Limits | No maximum loan amount | In 2025, the maximum loan amount is $524,225 |
Target Buyers | Low to moderate-income buyers in rural areas | All buyers |
Closing Costs | Rolled into the loan amount | Rolled into the loan amount or paid at closing. |
Interest Rates | Competitive and frequently lower than FHA rates | Competitive, however, is frequently higher than USDA rates. |
Refinancing Options | Loans can be refinanced with a Streamline USDA refinance | Loans can be refinanced with a Streamline FHA refinance. |
Similarities Between USDA and FHA Loans
Even though there are quite a few differences between USDA and FHA loans, there are also some similarities.
Government Backed
USDA and FHA loans are both backed by different departments of the United States government. This is a major reason why the lending requirements are less strict than conventional loans.
Designed for First-Time and Lower Income Homebuyers
With housing prices high across the country, it’s difficult for younger buyers to afford a sizable down payment on a home. However, because USDA and FHA loans have low or no down payment requirements, they are ideal for first-time homebuyers and anyone with a lower income.
Lower Credit Score Requirements Compared to Conventional Loans
Most lenders require a 620 credit score when applying for a conventional loan. That’s lower than the typical 640 needed for USDA. However, conventional mortgage rates tend to be very high for someone with score below 700, so conventional loans are often not a wise option for lower credit borrowers.
Likewise, FHA approval is much easier for those with lower credit compared with conventional loans.
Lower Interest Rates
Because the US government backs USDA and FHA loans, they typically have lower interest rates than you’d get with a conventional loan. However, mortgage insurance costs might mean that they cost as much or more monthly than a conventional loan, depending on your credit score.
Appraisals Are Needed
Whether you use a USDA loan or an FHA loan, you must have the home appraised before closing. This ensures the purchase price aligns with fair market value in your area. Additionally, USDA appraisers will verify that the home meets all the location requirements for a USDA loan.
Common Misconceptions
There are several misconceptions about USDA and FHA loans. Each of these can discourage people from using these products.
USDA Loans Aren’t Exclusive to Farms and Agricultural Workers
Some people believe you must purchase a farm or be an agricultural worker to be eligible for a USDA loan. However, USDA loans are available to anyone who qualifies and meets the location requirements set by the USDA. In fact, income-producing farms are not eligible for the program.
FHA Loans Are Only For First-Time Homebuyers
Even though FHA loans are an excellent option for first-time homebuyers because of their relaxed lending requirements and lower down payment options, they aren’t only for first-time homebuyers. They can be an option for someone with a lower credit score looking to purchase a home or even someone who hasn’t been able to save up much of a down payment.
Which Loan is Right for You?
Understanding if a USDA or FHA loan will be the best option will likely depend on your situation. FHA loans can be great if you’ve been able to save a little bit of a down payment but have a lower credit score.
However, USDA loans can be the perfect option if you don’t have a down payment, have a lower income, and are purchasing a home in a USDA-eligible area.
“I had a newly married couple looking to buy their first home in a rural area of Utah,” says Mike Roberts, Co-Founder of City Creek Mortgage. “They found a beautiful property listed at $250,000. With a USDA loan, they could finance the entire amount with no down payment required. This made it much easier for them to move in without draining their savings.”
“Now, if they had gone with an FHA loan, they would have needed at least $8,750 upfront for the down payment, which could have been a dealbreaker for them,” Roberts continues. “So in this case, the USDA loan was the best bet.”
Comparing Costs: Real-World Examples of USDA vs. FHA Loans
Before choosing between a USDA and FHA loan, it’s important to understand how the costs compare. Let’s walk through an example of how much it would cost to buy a $200,000 home using either type of loan. Keep in mind that rates mentioned are for example purposes only and may not be available.
USDA Loans
When purchasing a home with a USDA loan, let’s assume it’s done without a down payment and an interest rate of 7% (example purposes only) on a 30-year loan. This means your loan amount will be $200,000. Here are a few of the expenses you can expect.
Upfront Guarantee Fee: $200,000 x 1% = $2,000
Monthly Guarantee Fee: ($200,000 + $2,000 x 0.35%) / 12 = $58.91
Monthly Principal and Interest Payment: $1,343 (does not include taxes/insurance/HOA)
FHA Loans
Now, let’s assume you purchase the same $200,000 home, but instead, you’re using an FHA loan and a 3.5% down payment. Your interest rate is 6% on a 30-year loan. Here’s how your costs would change compared to a USDA loan.
Upfront Mortgage Insurance: ($200,000 x 96.5%) x 1.75% = $3,377
Monthly Mortgage Insurance Premium: ($193,000 + $3,377 x 0.55%) / 12 = $90
Monthly Principal and Interest Payment: $1,306 (does not include taxes/insurance/HOA)
FAQs About USDA and FHA Loans
Can I refinance a USDA or FHA loan?
If you already have a USDA or FHA loan, you can refinance your loan. If you don’t plan to switch loan products, one of the simplest ways to refinance is by using a USDA Streamline refinance or an FHA Streamline refinance.
What happens if my income changes after I get a USDA loan?
The USDA will review your payments and household income annually. If your income increases, it will typically increase your monthly mortgage payment.
Is it possible to qualify for both loan types?
While it’s possible to qualify for both a USDA or FHA loan, you’ll want to choose the best loan for your situation. USDA loans are best for people with low incomes who don’t have a down payment. However, FHA loans are ideal for borrowers who have a smaller down payment available but have a lower credit score.
