When it comes to buying a home with a government-backed mortgage, two of the most popular options are FHA (Federal Housing Administration) loans and USDA (United States Department of Agriculture) loans. While both programs help borrowers with low to moderate incomes secure home financing, they have key differences in eligibility, down payment requirements, and property location restrictions.

In this post, we’ll break down the differences between FHA vs. USDA loans so you can determine which one best suits your needs.

Overview of FHA and USDA Loans

Both FHA and USDA loans are designed to make homeownership more accessible, but they serve different types of buyers:

• FHA loans are intended for borrowers with lower credit scores and minimal savings for a down payment. They are widely available and do not have location restrictions.
• USDA loans are designed for homebuyers purchasing properties in rural or suburban areas. They require no down payment but have income limits.

FHA Loans: The Basics

• Minimum Down Payment: 3.5% (with a credit score of 580+)
• Credit Score Requirement: Minimum of 550 (with 10% down); 580+ for 3.5% down
• Loan Limits: Subject to county-specific FHA loan limits
• Mortgage Insurance: Required (Upfront and Annual Premiums)
• Property Restrictions: Can be used for primary residences only
• Location Restrictions: None
• More flexible with debt to income ratio

USDA Loans: The Basics

• Minimum Down Payment: 0% (100% financing available)
• Credit Score Requirement: 640+ preferred (lower scores may qualify with compensating factors)
• Loan Limits: No official loan limits, but income eligibility caps apply
• Mortgage Insurance: Required (but lower than FHA)
• Property Restrictions: Must be a primary residence
• Location Restrictions: Must be in a USDA-eligible rural or suburban area
• More restrictive than FHA on debt to income ratio

Key Differences Between FHA and USDA Loans

Down Payment Requirements

• FHA Loans: Require a minimum of 3.5% down (higher if your credit score is below 580).
• USDA Loans: No down payment required, making them an excellent option for buyers with limited savings.

Credit Score Requirements

• FHA Loans: Available to borrowers with credit scores as low as 550, though a score of 580+ is needed for the lowest down payment.
• USDA Loans: Prefer a credit score of 640+, but some lenders allow lower scores with additional underwriting.

Location and Property Restrictions

• FHA Loans: Can be used anywhere in the U.S. for a primary residence.
• USDA Loans: Available only for homes in USDA-eligible rural or suburban areas (check the USDA eligibility map).

Income Limits

• FHA Loans: No income limits.
• USDA Loans: Income must be within 115% of the median household income for the area.

Mortgage Insurance Costs

• FHA Loans: Require both Upfront Mortgage Insurance Premium (UFMIP) (typically 1.75% of the loan amount) and Annual Mortgage Insurance Premium (MIP) (ranging from 0.45% to 1.05%).
• USDA Loans: Require a 1% upfront guarantee fee and an annual fee of 0.35%, which is generally lower than FHA mortgage insurance costs.

Which Loan Is Best for You?

Choose an FHA Loan If:

✅ You have a lower credit score
✅ You are buying in an urban or suburban area
✅ You don’t meet USDA income or location requirements
✅ You can afford a small down payment

Choose a USDA Loan If:

✅ You want a zero down payment option
✅ You have moderate income within USDA limits
✅ You are buying in a USDA-eligible rural or suburban area
✅ You have a credit score of 640+ (for an easier approval process)

Final Thoughts

Both FHA and USDA loans provide great opportunities for buyers who may not qualify for conventional loans. If your priority is a low down payment and flexibility in location, FHA is a solid choice. If you meet the income and location criteria, USDA loans offer the advantage of no down payment and lower mortgage insurance costs.

Before making a decision, consult with a mortgage lender to evaluate your eligibility and find the best financing option for your home purchase.