If you are buying a home with little saved for a down payment, you have probably heard of USDA and FHA loans. Both programs can open the door to homeownership when traditional loans feel out of reach. However, they work differently, and the better fit depends on where you buy, your credit, and your income.
Now, let’s break down exactly how each loan works and when one might be a better choice than the other.
Which is better, USDA or FHA loans?
If you qualify, a USDA loan is usually a better option than an FHA loan because of the 0% USDA down payment benefit and the lower upfront and ongoing guarantee loan fees compared to FHA loans’ upfront and monthly mortgage insurance premiums.
USDA loans can be trickier to qualify for because they have two qualification filters, which include property eligibility and income limits. A buyer could check every box for credit and debt-to-income ratio, yet be disqualified if the home they want is in a non-eligible location.
FHA loans remove these location and income requirements, so they are often the fallback when USDA does not work. However, FHA loans also allow for more flexible debt-to-income requirements and accommodate a wider range of property types, such as certain condos or two- to four-unit homes, which can make them a better choice in those cases.
As always, when deciding between mortgage types, your personal situation plays the biggest role.
USDA vs. FHA Loan Basics
Before we go further, it helps to understand these programs more fully. The U.S. Department of Agriculture (USDA) offers two main types of home loans: the USDA Guaranteed Loan and the USDA Direct Loan.
Most people use the guaranteed loan. Private lenders offer it, while the USDA backs it, meaning that if the borrower defaults, the USDA will cover a portion of the loan amount. The USDA guaranteed loan is aimed at low- to moderate-income borrowers looking to buy a home in eligible rural or suburban areas.
The Federal Housing Administration (FHA) loan works differently. It is insured by the FHA, not location-restricted, and often a top pick for first-time buyers or borrowers with lower credit scores.
Both loans make it possible to skip the traditional 20% down payment, but the cost structure, eligibility rules, and long-term impact on your finances can differ greatly.
Knowing the differences between USDA loans and FHA programs is key to making an informed decision.
USDA vs. FHA Loan Eligibility Requirements
Review this side-by-side comparison to make the differences between FHA and USDA loans clear:
| Requirement | USDA Loan | FHA Loan |
|---|---|---|
| Credit Score | 620+ for most lenders (some allow manual underwriting with lower scores) | 580+ for 3.5% down, 500–579 for 10% down (ultimately is up to lender) |
| Down Payment | 0% required | 3.5% (10% if credit score is 500–579) |
| Debt-to-Income (DTI) Ratio | Typically 41% max, higher possible with compensating factors | Typically 43% max, higher possible with compensating factors |
| USDA Guarantee Fee | 1% of the loan amount upfront plus 0.35% of the remaining amount annually | None |
| FHA Mortgage Insurance | None | 1.75% upfront plus 0.55% annually (varies by down payment and term) |
| USDA Property Eligibility | Must be in USDA-eligible rural or suburban area | No property location restrictions |
| USDA Income Limits | 115% of the area’s median income | No income limits |
| Loan Limits | No loan limits, must meet affordability guidelines | FHA county loan limits apply and vary by location |
For example, let’s say your household earns $90,000 and you want to buy a $350,000 home in a suburb just outside a major city. The suburb is USDA-eligible, but the income limit for that county is only $82,000.
Even if you meet the credit and DTI requirements, you would not qualify for the USDA program because of your income. In this case, FHA would likely be the better path.
FHA vs. USDA Loan Rates
In many market conditions, USDA loan rates are often in line with, or slightly below, conventional loan rates, while FHA loan rates are competitive but may run 0.125% to 0.25% higher than USDA rates. Although that may seem like a slight difference, it can make a noticeable impact over time.
Consider this: on a $250,000 loan, a 0.25% rate difference could save about $40 a month. That is roughly $480 per year, or nearly $15,000 over a 30-year mortgage. For a family trying to keep their monthly budget in check, that is meaningful.
Rates vary by lender, credit score, and market conditions, so it is worth requesting quotes for both programs before deciding between USDA vs. FHA loan options.
USDA vs. FHA Loan Application
The good news is that both applications are relatively simple, especially with the help of a trusted lender. Most lenders can help you determine your eligibility for each program in a single conversation.
Many offer both, making it easy to compare your USDA and FHA preapprovals side by side. Here is what the process typically looks like:
Check eligibility online. The USDA has a property map where you can see if a home qualifies, and both programs have clear income and credit guidelines.
Find a lender who offers both USDA and FHA. This allows you to compare rates and costs side by side without starting from scratch.
Submit your application. Be ready with pay stubs, tax returns, bank statements, and details on your target property.
Get preapproved. This tells you exactly what price range you can shop in and signals to sellers that you are serious.
Choose your home and close your loan. Once under contract, your lender will guide you through processing, underwriting, and closing.
Whether you end up with a USDA or FHA loan, financing depends on your credit, savings, income, and location. Both can be powerful tools for getting into a home sooner, without years of saving for a 20% down payment.
Next steps: If you are ready to explore your options, take a few minutes today to check your eligibility for both USDA loans and FHA loans through Neighbors Bank. You may be closer to your dream home than you think!
Dan Bartelt has over 16 years of mortgage industry experience. He’s held roles as a loan officer and processor and has spent the past 8 years as an underwriter. Dan views underwriting as solving a puzzle—piecing together details to create a compelling loan story.
