FHA loans vs. USDA loans: 6 key differences

Several agencies within the federal government have programs to help different homebuyers — such as first-time buyers, low-income families and military veterans — afford real estate.

Two of the more well-known government-backed mortgage options are FHA loans from the Federal Housing Administration and USDA loans from the United States Department of Agriculture. FHA loans are more widely accessible since they’re generally not limited by location, and they often help first-time buyers. USDA loans, on the other hand, help people afford homes in rural areas.

FHA loans

FHA loans are widely available mortgage loans offered by private lenders and insured by the FHA. As a result, lenders can offer these mortgages to those who are otherwise unable to get a conventional mortgage. Borrowers can get FHA loans for various amounts; in 2022, the maximum mortgage amount ranges from $420,680 to $970,800, depending on the county you’re in.

Types of FHA loans

There are several types of FHA loans, including options for energy-efficient homes, condominiums and manufactured homes, but the most common type of FHA loan is the Basic Home Mortgage Loan 203(b). We’ll focus on the specifics of this popular loan option, but you can learn more about the other types from the U.S. Department of Housing and Urban Development.

Who can get an FHA loan?

Nearly anyone can get an FHA loan, but they’re particularly helpful for first-time homebuyers because they allow people to purchase homes with smaller down payments.

FHA loan eligibility requirements

Because FHA loans are insured by a government agency, requirements are often less strict than for a conventional mortgage.

Credit score: The minimum credit score needed for an FHA 203(b) loan is 500. However, you’ll need a score of at least 580 to qualify for the lowest possible down payment. A higher credit score can also qualify you for lower rates.

Down payment: If your credit score is 500 to 579, you’re only eligible for a 90% loan-to-value ratio on your 203(b) FHA loan, which generally means you need to put down at least 10% on your home. However, if your credit score is 580 or greater, you can make a down payment of as little as 3.5% since you qualify for maximum funding.

Income: There’s no income requirement for 203(b) FHA loans. Instead, the FHA looks at your debt-to-income ratio, which measures your monthly debt payments as a percentage of your monthly income. You generally need a DTI of 43% or lower to get an FHA loan, but a lower DTI ratio could qualify you for a better interest rate.

USDA loans

USDA loans are designed to help homebuyers in rural areas afford homes. The USDA has two programs for people looking to buy single-family homes: the Section 502 Guaranteed Loan Program and the Section 502 Direct Loan Program. USDA-guaranteed loans are more common, but we’ve also included some information on USDA-direct loans to make their distinctions clear and help you choose the right program for your needs.

It’s important to familiarize yourself with both types if you’re interested in a USDA loan. One of our reviewers from Maryland was frustrated because their mortgage lender wasn’t clear about this distinction and other information on USDA loans “because no one knows anything about it.”

Types of USDA loans

To get a USDA-guaranteed loan, you’ll need to go through a USDA-approved lender. While these loans aren’t provided directly by the USDA, the government does guarantee a portion of the loan for the lender, making home loans accessible to a broader range of applicants.

Rather than guaranteeing loans from outside lenders, the USDA Direct Loan Program provides payment assistance to increase borrowers’ ability to repay their loans.

While USDA-guaranteed loans are intended for low- to moderate-income borrowers, USDA-direct loans are designed for low- and very-low-income borrowers. That means USDA-direct loans have lower maximum income limits and loan amounts that are limited in ways that USDA-guaranteed loans aren’t.

USDA-direct loan limits vary by county, ranging from $285,000 in parts of New Hampshire to $970,800 in California’s Santas Cruz County as of 2022. However, $336,500 is a typical maximum for USDA-direct loans throughout the U.S. Meanwhile, the only maximum limit on a USDA-guaranteed loan is the appraised value of your property and your funding fee.

USDA-direct loans have longer repayment terms than USDA-guaranteed loans.

Who can get a USDA loan?

You can get a USDA loan if you’re buying a home in an eligible rural area and plan on using it as your primary residence. It’s important to note that a USDA loan can’t be put toward a property you intend to rent out or use as a second home.

USDA loan eligibility requirements

Credit score: The USDA doesn’t require a specific credit score for its mortgagors. However, many outside lenders ask for a minimum credit score of 640, and that general rule is the same with USDA-direct loans. As with FHA loans, a higher credit score could still help you secure lower rates and larger loan amounts.

Down payment: There’s no down payment requirement for USDA loans. A larger down payment can help you secure a lower rate, though.

Income: To get a USDA-guaranteed loan, you must have a household income of no more than 115% of your area’s median income (as defined by the USDA). According to the Federal Deposit Insurance Corp. (FDIC), about 30% of USDA-guaranteed loans from the USDA go out to families with incomes below 80% of their area’s median income. For a USDA-direct loan, your income will need to meet an even lower threshold that varies by location.

FHA vs. USDA loans

Ultimately, the decision between a USDA and an FHA loan might not really be a choice — it depends on where you live and your income, as well as how much you can afford to put down and your credit score.

Bottom line: Is an FHA loan or a USDA loan right for you?

Both FHA and USDA loans can put an excellent home within reach of your budget, but these loans are intended for different types of borrowers.

FHA 203(b) loans are broader in terms of eligible properties and income requirements, and while they may have more defined credit requirements, the actual credit score you’ll need to get one is often lower. Down payment requirements on these FHA loans are also lower than most conventional loans.

This makes FHA loans a good option for first-time homebuyers in urban or suburban areas who may not have strong credit or enough savings for a conventional down payment.

USDA loans are designed for people purchasing in rural areas, and USDA-guaranteed loans don’t have a maximum loan amount or a minimum down payment. However, USDA lenders generally want to see a higher credit score, and you’ll need to meet income requirements to qualify.

USDA loans can be good for families with moderate or lower incomes who want a nice home and are willing to live in a rural area.

Ultimately, you’ll need to look over your finances and credit score, then compare loan requirements to decide which is right for you.