When deciding between a USDA vs. conventional loan, the right choice depends on your personal financial situation and long-term goals. Both loans help people buy homes, but they are built for slightly different types of borrowers.
If you are wondering which is better for you, the first step is understanding how they work, what each requires, and the long-term costs involved. Once you know that, it becomes much easier to determine which option will set you up for a successful homebuying experience.
USDA vs. Conventional Loan Rates
Interest rates make a huge difference in your monthly home payments and payments over the life of your loan. When comparing a conventional loan vs. a USDA loan, you will often find that USDA loans have slightly lower interest rates for borrowers with average credit scores.
Since the U.S. Department of Agriculture backs USDA loans, lenders have reduced risk. With less risk, lenders can offer better rates to people who might not qualify for the most competitive conventional loan terms.
For example, imagine two borrowers, both buying a $250,000 home. One has a 660 credit score and applies for a USDA loan, while the other has the same score but applies for a conventional loan. The USDA borrower might get a 6.0% interest rate, while the conventional borrower could see a rate closer to 6.5%. Over 30 years, that difference adds up to thousands of dollars.
On the flip side, if your credit score is excellent and you can make a larger down payment, conventional rates can be as low or even lower than USDA rates. Plus, you won’t have to worry about paying the USDA’s annual guarantee fee for the life of the loan. That combination can make conventional loans the more cost-effective choice for well-qualified buyers.
USDA vs. Conventional Loan Benefits
Before we dig deeper into the details, it is important to know that there are two types of USDA loans: USDA Guaranteed Loans and USDA Direct Loans. USDA Guaranteed Loans are issued by private lenders and backed by the USDA.
USDA Direct Loans come directly from the government and are designed for very low-income borrowers. In this article, we focus on USDA Guaranteed Loans, as they are the most widely used option for borrowers who qualify.
Here is a side-by-side look at the benefits of each loan type:
| Feature | USDA Loan | Conventional Loan |
|---|---|---|
| Down Payment | 0% required | 3% (through certain programs) typically 5% to 20% |
| Credit Score Flexibility | Accepts scores as low as 620 | Best terms for 720+ |
| Income Limits | Yes, based on the area median income | No income limits |
| Property Location | Must be in a USDA-eligible rural or suburban area | No location restrictions |
| Mortgage Insurance | Annual guarantee fee (0.35%) for life of loan | PMI can be canceled at 20% equity |
| Interest Rates | Often lower for average credit | Often lower for excellent credit |
| Closing Costs | Can be financed into the loan | Paid upfront or with seller assistance |
If you have a strong credit score, say 720 or above, and you’ve been able to set aside enough for a down payment, a conventional loan will usually give you the best bang for your buck over the long haul.
You can snag a great interest rate, skip the permanent annual USDA guarantee fee, and have the freedom to buy in just about any location or choose from a wider variety of property types.
On the other hand, if your credit score is closer to the 600s or you haven’t built up much savings yet, USDA loans are built with you in mind. They make it possible to buy a home without a single dollar down, while still offering a competitive rate. Of course, this is provided if you meet the income and location guidelines.
USDA vs. Conventional Loan Requirements
When comparing USDA vs. conventional loan qualifications, the basics are the same: lenders want to see stable income, a good repayment history, and proof you can handle your mortgage payments. The differences come in the details.
Credit Score
For both USDA and conventional loans, the minimum credit score with Neighbors Bank is typically 620. However, simply qualifying for a mortgage greatly differs from truly getting the best deal. With a conventional loan, you usually only see the real cost advantage if your credit score is 720 or above, since higher scores unlock lower interest rates and cheaper PMI.
For example, someone with a 725 score could get a conventional loan with a low rate and minimal PMI costs. However, if your score is 660, your conventional loan rate might be much higher, and your PMI could be expensive. In that case, a USDA loan might save you money each month.
Additionally, USDA loans have more forgiving credit history requirements and quicker seasoning periods for buyers who have experienced foreclosure or bankruptcy.
Down Payment
One of the most appealing features of a USDA loan is that you do not need a down payment at all. That is a huge advantage if you are short on savings but want to buy sooner. For example, on a $200,000 home, skipping a 5% down payment means keeping $10,000 in your pocket.
Although some conventional loans (such as HomeReady® or HomePossible®) require only 3%, most lenders require 5% to 10% down. While putting more down can help you secure a lower interest rate and remove PMI faster, it also means you need more cash upfront. If you have been saving for years, this might not be a problem, but if you are just starting out, it can delay your plans.
USDA Property and Income Rules
USDA loans come with two major restrictions: location and income. The home must be located in a USDA-eligible rural or suburban area, which typically includes small towns, the outskirts of cities, and certain low-density suburbs. Most major cities and busy metro suburbs don’t qualify.
USDA loans also have a household income cap, generally set at 115% of the area’s median income. This includes the earnings of all adults in the home, not just the borrower. For example, if the median income in your town is $70,000, your household usually needs to earn less than $80,500 annually to qualify.
These limits can make USDA loans a less-than-ideal fit for higher-income buyers or those looking in pricier urban markets. Conventional loans, by contrast, have no such rules and can be used for nearly any property in any location.
Guarantee Fee vs. Private Mortgage Insurance
Both USDA and conventional loans require some form of mortgage insurance, but they work differently. With a USDA loan, you pay a one-time upfront guarantee fee equal to 1% of the loan amount, along with an annual fee of 0.35%. The annual fee lasts for the life of the loan, so it remains in place unless you refinance into a different loan type.
Conventional loans, on the other hand, require private mortgage insurance (PMI) if you put down less than 20%. The cost of PMI depends on your credit score and down payment size, but the big advantage is that you can cancel it once you reach 20% equity.
USDA Loan Fees vs. PMI Cost Example Comparison
| Loan Type | Home Price | Upfront Fee | Annual Fee vs. PMI | Duration of Annual Fee |
|---|---|---|---|---|
| USDA Loan | $250,000 | $2,500 (1% upfront guarantee fee) | $875 per year (0.35% of remaining balance) | For the life of the loan (unless refinanced) |
| Conventional Loan | $250,000 | None | $1,500 per year (approximate PMI) | Until 20% equity is reached (typically 6–8 years) |
If you plan to keep the loan for a long time, conventional PMI can end up being cheaper overall. However, if you don’t have a down payment saved, a USDA loan can make buying a home possible now.
Loan Limits
USDA-guaranteed loans do not have a fixed national maximum, but your income and debt-to-income ratio still limit the amount you can borrow. This typically makes them a better fit for modestly priced homes in eligible rural or suburban areas.
Conventional loans, on the other hand, have set conforming loan limits that change each year. For 2025, the limit in most of the U.S. is $806,500, while high-cost areas such as Los Angeles, San Francisco, New York City, and certain parts of Hawaii and Alaska have limits as high as $1,209,750.
If you buy in one of these expensive markets, a conventional loan is often the only realistic option since USDA borrowing rules and eligibility requirements generally cannot support the higher loan amounts needed for those price ranges.
Occupancy
USDA loans must be used to purchase a primary residence, while conventional loans can be used for any home purchase type. USDA rules are stricter, meaning you cannot use a USDA loan to buy a vacation home or investment property, and you must move in within 60 days of closing.
If you plan to purchase a second home or an investment property in the future, conventional loans are more flexible. Once you meet the lender’s requirements, you could use a conventional loan to buy a beach condo, a rental property, or a city apartment in addition to your primary residence.
Deciding Between a USDA and a Conventional Loan
In short, deciding between a USDA vs. conventional loan really comes down to three things: your credit score, savings, and long-term goals. If your credit is strong and you can put 20% down, a conventional loan will often save you more over time. Once private mortgage insurance is gone, you’ll enjoy lower monthly payments and the freedom to buy in any location or choose from a wider range of property types.
If your credit score is under 700, you have little or no savings for a down payment, and you’re buying in an eligible area, a USDA loan can be a powerful way to get into a home sooner. It allows you to start building equity now rather than spend years saving up a large down payment.
Both loan types serve a purpose and are designed for different types of borrowers. By taking a close look at your numbers, timeline, and location, you can choose the option that best supports your long-term homeownership plans.
Get started here, and a Neighbors Bank loan expert will help you run the numbers.
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
