VA loans and USDA loans are both government-backed home loans known for their 100% financing option, allowing you to buy a home without a down payment. While VA loans are usually the better option for eligible veteran and servicemember borrowers, USDA loans come with their own variety of unique benefits, which can make them a great option as well.
With both USDA and VA loans on the table, it can be hard to decide which program to choose. In this guide, we’ll break down the key differences, benefits, and drawbacks of USDA vs. VA loans to help you decide.
Key Points
- Eligibility: VA loans are mostly open only to veterans and active-duty servicemembers, while USDA loans are only available for low- to moderate-income buyers looking to buy in qualified rural or suburban areas.
- Location Restrictions: VA loans have no income limits and almost no location restrictions, whereas USDA loans require the property to be in a USDA-approved area and have income limits based on the household size and county.
- Loan Limits and Amounts: Neither loan product has maximum loan amounts. Loan amounts are based on the borrower’s financial qualifications and other factors.
- Credit Requirements: USDA loans typically require a minimum credit score of 640, while VA loans usually require a score of 620, with some flexibility depending on the lender.
- Interest Rates and Fees: Both loan types offer competitive interest rates and similar closing costs. VA loans include an upfront funding fee, and USDA loans have an upfront mortgage insurance premium plus an annual fee.
Table of Contents
- Benefits of VA Loans and USDA Loans
- Loan Program Eligibility
- Income Qualifications
- Loan Limits
- Credit Requirements
- Interest Rates and Loan Fees
- Down Payment Requirements
- Mortgage Insurance Requirements
- USDA & VA Renovation and Rehab Loan Options
- Lending Options
- Which is Better – VA Loan vs. USDA Loan
- More Reading
Benefits of VA Loans and USDA Loans
VA and USDA loans are both backed by U.S. government agencies—VA loans by the Department of Veterans Affairs and USDA loans by the United States Department of Agriculture. These loans are issued by private lenders and guaranteed by the VA or USDA if the borrower defaults.
Both loan types offer great benefits, including:
- No down payment requirement
- No government-set minimum credit score requirement (though the private lenders usually have a requirement – more on this below)
- No private mortgage insurance required
- Both loan types can be accessed multiple times
- Bankruptcy and/or foreclosure don’t automatically disqualify you from either loan type
However, there are key differences. Here’s a quick overview of the key similarities and differences between USDA and VA loans:
| USDA Loans | VA Loans |
| General public is eligible | Mostly available to qualifying active-duty servicemembers and veterans |
| Has income limits | No income limits |
| No loan limits | No loan limits* |
| No USDA-set credit score requirements, but lenders generally require 640 | No VA-set credit score requirements, but lenders generally require 620 |
| Eligibility based on location | Almost no location restrictions |
Loan Program Eligibility
VA loans and USDA loans share several eligibility requirements, including:
- Primary residence: Both loan types require the property to be used as the borrower’s primary residence. This means that you can’t use either loan to finance a vacation home or investment property, such as a rental property or a house you intend to flip and sell.
- VA loans, however, can be used to purchase a property with up to four units. So, as long as you intend to use one of them as your primary residence, you can still profit off of the property’s other units. USDA loans don’t allow this.
- U.S. Citizenship or Legal Residency: Borrowers must be U.S. citizens, non-citizen nationals, or qualified aliens.
- Stable Income: Borrowers must demonstrate a stable income sufficient to meet loan payments and other obligations.
- Creditworthiness: While neither program has a minimum credit score set by the government, lenders typically require borrowers to have a satisfactory credit history.
Both loan types have restrictions on the type of property that is eligible, which include:
- New Construction Homes: USDA and VA loans can finance the construction of a new home, including purchasing the land and funding the building process. For USDA loans, the property must be in a qualified rural or eligible suburban area.
- Modular Homes: Prefabricated modular homes are eligible under both loan programs, provided they meet local and state codes and are permanently affixed to a foundation.
- Manufactured Homes: Both loan types can finance manufactured homes, but there are specific requirements. The home must be permanently affixed to a foundation and classified as real estate. Additionally, the home must meet the specific guidelines set by the USDA or VA.
- Condos and Townhouses: Condos and townhouses are eligible for USDA and VA loans if they are part of approved projects. The VA maintains a list of approved condominium projects, and USDA-approved condos must be in eligible rural areas.
- Foreclosed and Short Sale Properties: Both USDA and VA loans can be used to purchase foreclosed or short sale properties, as long as the property meets the respective program’s standards, passes the necessary appraisals and meets other guidelines.
Neither loan allows you to buy properties such as vacation homes, rental properties or farms with the sole intention of producing income.
VA Loans Eligibility
VA loans are available to any eligible veteran or active-duty military personnel. Loans are available across the U.S., and there are no income restrictions.
The key differences in property eligibility between a VA loan and a USDA loan are that VA loans allow multi-family homes and, unlike USDA loans, have no restrictions regarding the modesty of the home. There are also few to no restrictions regarding location.
USDA Loans Eligibility
USDA loans have the following specific eligibility requirements:
- You must qualify as a low- or moderate-income household based on income limits in your county of residence.
- The property must be located in a qualified rural area.
- Homes need to be considered modest for the area in which they are located. For example, they can’t contain in-ground pools.
- The home must be a single-family home and cannot have multiple units.
Income Qualifications
USDA and VA loans differ in terms of income requirements. The USDA loan is unique because it specifically provides the opportunity for homeownership in rural, generally low-income areas.
VA Loan Income Qualifications
First, VA loans have no maximum income limit. The more you earn, the better. Instead, your income qualification is based in part on your debt-to-income ratio (DTI).
It’s a ratio in which you divide your gross monthly income by your major recurring monthly obligations, including the new house payment.
The VA doesn’t have a hard cap for DTI ratio, and these will vary by lender.
VA loans include a secondary income qualifier, referred to as residual income. This is determined by your income, your new house payment, recurring monthly payments, income taxes, utilities and your household family size.
Veterans whose DTI ratio exceeds 41% need to meet a higher benchmark for residual income.
USDA Loan Income Qualifications
Unlike VA loans, USDA loans have a maximum income limit, which is set at 115% of the median income in your county and adjusted based on household size. Here are typical income limits:
- $91,900 for a household of 1-4 people
- $121,300 for a household of 5 or more people
In higher-cost areas, USDA income limits may be even more generous. The USDA uses your adjusted gross income to determine eligibility, considering deductions for childcare, medical expenses for elderly family members, and other allowances.
USDA loans also have specific debt-to-income (DTI) requirements. The first DTI calculation is for your housing payment, including mortgage principal and interest, property taxes, homeowner’s insurance, mortgage insurance, and any HOA fees, and is generally limited to 29% of your gross monthly income. The total DTI, which includes your housing payment and other recurring debts like auto loans and credit cards, is limited to 41%.
This is similar to VA loan requirements, where the acceptable DTI can exceed the guidelines with strong compensating factors.
Loan Limits
Maximum VA Loan Amounts
The VA eliminated VA loan limits in 2020 for veterans with full entitlement. For veterans with partial entitlement, the maximum VA loan total for single-unit homes is $766,550 in most locations. However, that number can be increased to $1,149,825 in places determined to be high-cost housing markets. For more information on VA loan entitlement, check out our guide: VA Loan Entitlement Explained.
Loan amounts are decided at the county level, so you’ll need to check the loan limits for any county you suspect to be in a high-cost area.
The maximum loan amounts are higher for two-to-four-unit properties and are as follows:
- Two units: $981,500 in most areas, but up to $1,472,250 in high-cost areas
- Three units: $1,186,350 in most areas, but up to $1,779,525 in high-cost areas
- Four units: $1,474,400 in most areas, but up to $2,211,600 in high-cost areas
Jumbo VA loans are also an option, which allows veterans to borrow even more than what a standard VA loan will allow.
Maximum USDA Loan Amounts
USDA loans have no maximum loan amount. The USDA bases loan limits on each individual borrower’s financial situation and qualifications.
Credit Requirements
Neither VA nor USDA loans have a government-imposed minimum credit score. However, private lenders who issue these loans generally set their own credit requirements.
VA Loan Credit Requirements:
- No VA-Imposed Credit Score: The VA doesn’t set a minimum credit score, but it requires borrowers to have a clean credit history for the past year, especially regarding mortgages.
- Lender Requirements: Most lenders require a minimum credit score of 620, although this can vary.
- Bankruptcy and Foreclosure: You must wait at least two years after a Chapter 7 bankruptcy discharge to close on a VA loan and often three years if the foreclosure involved a VA loan.
USDA Loan Credit Requirements:
- No USDA-Imposed Credit Score: The USDA doesn’t set a minimum credit score, but private lenders typically look for a score of 640 or better.
- Lender Flexibility: While 640 is a common minimum, some lenders may approve loans for borrowers with lower scores depending on other financial factors.
- Bankruptcy and Foreclosure: You must wait at least 36 months after bankruptcy or foreclosure to apply for a USDA loan.
Interest Rates and Loan Fees
Both loan types offer competitive interest rates, which can be a major selling point.
VA Loan Interest Rates
Interest rates and fees on VA loans are similar to those on conventional and FHA loans. Loans can be either fixed-rate or adjustable-rate and have terms of 15-30 years.
Interest rates vary based on market factors (check out the latest on VA loan interest rates here). VA loan closing costs generally range between 2% and 5% of the property’s purchase price.
VA borrowers often negotiate with the seller to cover at least some of the closing costs.
USDA Loan Interest Rates
According to the USDA, interest rates on USDA loans are structured as follows:
- Individual lenders set interest rates, but an excellent credit score and low debt-to-income ratio can contribute to getting the lowest rate possible.
- Interest rates with payment assistance can be as low as 1%.
- A 38-year payback period is an option for very low-income applicants who can’t afford the 33-year loan term.
Closing costs can range between 2% and 5% of the property’s purchase price. USDA loans are the only mortgage type that allows borrowers to include their closing costs in the loan amount.
This will result in a loan amount greater than 100% of the property’s purchase price. However, sellers can pay up to 6% of the purchase price in closing costs for buyers, avoiding the need to add those costs to the loan amount.
Down Payment Requirements
Generally speaking, the biggest single benefit of VA loans and USDA loans is 100% financing. That means the borrower can purchase a home with no down payment.
Mortgage Insurance Requirements
Neither VA loans nor USDA Loans require private mortgage insurance. However, both loan types have a specific fee that serves a similar purpose.
VA Loans: VA Funding Fee
The VA funding fee is an upfront charge added to the loan amount. The fee amount varies based on the type of loan. Generally, it can range from 1.25% to 3.3% of the loan amount. Veterans receiving compensation for a service-connected disability and select others don’t have to pay this fee.
USDA Loans: Mortgage Insurance Premiums and Annual Premiums
An upfront mortgage insurance premium is added to your USDA loan amount, like VA loans. The fee is 1% of your base loan amount.
There is also an annual premium of 0.35% of your loan amount. For example, if your base loan amount is $200,000, the annual premium will be $700. This is generally wrapped up in your monthly mortgage payment. So, even though it’s an annual premium, you’ll still pay it monthly.
USDA & VA Renovation and Rehab Loan Options
Both USDA and VA rehab loans allow for various renovations and repairs that improve a home’s safety, livability, and energy efficiency.
VA Rehab Loans
A VA rehab loan can provide funds for the purchase and renovation of a substandard-condition home. This loan option can be used as both a purchase loan and a refinance loan.
Under the program, your loan amount will be the lower of either the property’s as-completed value – its appraised market value upon completion – or the acquisition cost, which is the purchase price plus the cost of renovations.
USDA Housing Repair Loans and Grants
Like the VA, the USDA provides loans to repair, renovate or upgrade your home. As is the case with USDA loans generally, they’re intended for low- to moderate-income borrowers.
You can receive a loan of up to $20,000 for repairs. Very low-income borrowers aged 62 and older may also qualify for grants of up to $7,500. To be eligible, you must earn less than 50% of the median income in your county of residence. You must also be unable to qualify for a loan from an alternative source.
Lending Options
While both VA loans and USDA loans are backed by government agencies, they’re both offered and serviced by private lenders. You can generally find VA loans and USDA loans through:
- Banks
- Credit unions
- Mortgage companies
- Specialized lenders
Which is Better – VA Loan vs. USDA Loan
The primary advantage of VA loans and USDA loans is that both offer 100% financing. This allows you to purchase a home and even make improvements to it with no upfront cash outlay.
If you’re an eligible servicemember or veteran, a VA loan is generally the better option since it typically offers lower average rates and imposes no income or geographic restrictions.
However, a USDA loan is a great option if you qualify as low- to moderate-income and can’t qualify for a VA loan based on income requirements.
USDA loans have relatively limited use, given the income and location restrictions. But if you qualify, they may prove to be an even better choice than a VA loan.
More Reading
VA Loan Appraisal and Inspection Requirements
VA Loan Eligible and Ineligible Properties
Equal Housing Opportunity. The Department of Veterans Affairs affirmatively administers the VA Home Loan Program by assuring that all Veterans are given an equal opportunity to buy homes with VA assistance. Federal law requires all VA Home Loan Program participants – builders, brokers, and lenders offering housing for sale with VA financing – must comply with Fair Housing Laws and may not discriminate based on the race, color, religion, sex, handicap, familial status, or national origin of the Veteran.
About Post Author
Comments:
About the comments on this site:
These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.
Young feather says
It seems you are confusing usda direct and usda Guaranteed. They are two different loan options and you have a mix of information from both programs. Usda Direct is for 80% median income or less. Usda Guaranteed is for 115% medium income or less.