USDA vs. VA Loans

If you are shopping for a low-down-payment mortgage, you’ve probably come across information about USDA and VA loans. Both of these lending types are popular options in government-backed lending.

They may seem similar on paper, since both offer no down payment, competitive interest rates, and flexible credit requirements. However, once you dig into the details, you will see that the USDA vs. VA loan comparison comes down to very different rules, costs, and eligibility requirements.

Let’s break down the details of each so you can figure out which one makes the most sense for your homebuying situation.

Check your loan eligibility here, and an expert will help you weigh your options.

USDA vs. VA Loan Rates

Interest rates are usually one of the first things buyers consider, and for good reason. Even a small difference in rates can add up to thousands of dollars over the life of a loan.

Both USDA and VA loans typically offer lower rates than conventional loans because of their government backing. This backing reduces the lender’s risk, so they reward you with better terms.

On average, USDA loan rates trend slightly lower than VA rates, especially for borrowers with lower credit scores. For instance, if your score is in the mid-600s, you might find that a USDA lender offers you a slightly lower rate than a VA lender.

However, VA loans can sometimes match or beat USDA rates if you have strong credit. Since VA loans do not have an annual fee, the “true cost” of the loan might still be lower over time, even if the interest rate is the same or slightly higher.

For example, let’s say you are offered a 6.25% rate on a USDA loan and a 6.35% rate on a VA loan for the same $250,000 purchase price. On paper, the USDA loan looks cheaper, but when you factor in the USDA’s 0.35% annual fee (about $875 the first year), the VA loan could come out ahead, especially if you plan to stay in the home for a long time.

The takeaway here is that the rate is important but not the whole story. Always look at the total cost of borrowing, not just the interest rate on your loan estimate.

USDA vs. VA Loan Requirements

A major difference between USDA and VA loans is the structure of long-term costs. VA loans tend to cost less over time because the VA funding fee is a one-time charge at closing. USDA loans have a smaller upfront fee, but they also include an annual fee that remains for the life of the loan.

VA loans are also more flexible with location and income since there are no geographic restrictions or income caps. As long as you meet the VA’s service requirements, you can use your benefit to purchase almost any home, in nearly any location.

For example, if you are stationed near a major city and want to live close to your workplace, USDA loans may not be an option due to location limits, but a VA loan would work perfectly.

Both USDA and VA loans aim to make homeownership more accessible, but their qualification rules are not identical. Let’s compare the main requirements for each.

Minimum Credit Score

Neither VA nor USDA loans set an official minimum credit score, but lenders do.

For USDA loans, most lenders want at least a 640 FICO score for automated underwriting. You might still get approved with a lower score through manual underwriting, but you need strong compensating factors, like a low debt-to-income ratio or a bigger emergency fund.

For VA loans, many lenders look for at least a 620 score, but there is a lot of flexibility. If you have had some credit hiccups, the VA’s guidelines allow lenders to consider your overall financial picture, not just your score.

Neighbors Bank typically requires a 620+ credit score for all loan types.

For instance, if you have worked hard to rebuild your credit after a medical bill collection, a VA lender might be more willing to look at your improved payment history, while a USDA lender may stick firmly to the 640 guideline.

Down Payment

Both loans have one thing in common: neither requires a down payment. That is a huge plus if you want to keep more cash in your pocket for moving costs, furniture, or an emergency fund.

Keep in mind that you will still pay closing costs. These can sometimes be rolled into the loan or covered by seller concessions, but you should always budget between 2 to 6% of your loan cost either way.

DTI Requirements

Your debt-to-income (DTI) ratio is a big deal for both programs.

USDA loans generally cap your total DTI at 41%, although higher ratios can be approved with compensating factors.

VA loans do not have a hard DTI limit and can typically be extended up to 50% with compensating factors; however, this policy will differ by lender. The VA also looks closely at residual income, which is how much money you have left over each month after all major expenses.

This means that a VA loan might work for you even if your DTI is slightly higher, as long as you have enough residual income to cover living expenses comfortably.

USDA Property Eligibility & Income Limits

To qualify for a USDA loan, your home must be in a USDA-eligible rural or suburban area. Even some neighborhoods just outside big cities qualify, but you need to check the USDA’s online map to be sure.

Additionally, your household income cannot exceed 115% of the area's median income. Your household income also includes all household members’ income, even if they are not on the loan.

Check your area’s USDA income limit here.

VA Certificate of Eligibility

To get a VA loan, you need a Certificate of Eligibility (COE) to prove you meet the service requirements. Getting it is usually quick; most lenders can pull it for you within minutes. However, once you have your COE, no location or income limits apply. If you qualify, you can buy anywhere, from a downtown condo to a rural farmhouse.

USDA Guarantee Fee vs. VA Funding Fee

One of the biggest cost differences between these loans is how their fees function. The USDA guarantee fee consists of a 1% upfront fee, which can be rolled into the loan, and a 0.35% annual fee.

The annual fee is paid for the life of the loan and is based on your remaining principal each year. The VA funding fee, on the other hand, is a one-time fee paid at closing. For first-time VA loan use, the fee is typically 2.15% of the loan amount with no down payment.

For subsequent VA loan use, it is generally 3.3%. Borrowers receiving VA disability compensation are exempt from the funding fee.

For example, if you buy a $250,000 home with no down payment, the USDA loan would include an upfront guarantee fee of $2,500 and an annual fee of $875 for the first year, which would decrease slightly each year as your principal decreases.

The VA loan for first-time use would include a funding fee of $5,375 and no annual fee. In this scenario, the USDA loan’s upfront fee is smaller, but the ongoing annual fee can make it more expensive over the life of the loan, especially if you keep the loan for decades. If you are exempt from the VA funding fee, the VA option becomes even more cost-effective.

Bottom Line

The choice between a USDA vs. VA loan or a VA loan vs. USDA loan comes down to three big things: eligibility, location, and long-term cost.

If you are a Veteran, active-duty service member, or qualifying spouse, the VA loan’s flexibility, lack of ongoing fees, and no property restrictions make it hard to beat. If you are buying in a USDA-eligible area and meet the income limits, a USDA loan can still be a fantastic, low-cost option.

The smartest move is to get prequalified for both if you can, then compare the numbers side by side. That way, you can see the difference in monthly payments, fees, and long-term cost.

Check your eligibility online, and a Neighbors Bank loan expert can help you explore what you qualify for and what loan options are best for you.