For those who are house-hunting on a budget, an FHA or USDA loan can be especially an affordable option worth considering. Because these mortgages are government-backed, their requirements are less stringent than those of conventional mortgages.
But what’s the difference between FHA and USDA loans, and why might you pick one or the other? We’ve compared eligibility requirements, down payments and the application process for both types to help you decide whether one of these government-backed mortgages is right for your situation.
Key Takeaways:
- Both FHA and USDA loans help low-income borrowers by offering lower up-front costs and competitive interest rates.
- USDA loans are limited to eligible rural and semi-rural areas and come in two types: Direct and Guaranteed.
- FHA loans have no income limits, while USDA loans require borrowers to meet income eligibility guidelines.
- FHA loans allow down payments as low as 3.5% nationwide, whereas USDA loans require no down payment at all.
USDA Vs. FHA Loans: The Key Differences
Both USDA loans and FHA loans are government-backed loans, which means that while most are issued by lenders such as credit unions, banks and online mortgage brokers, they are all insured by the U.S. government against default. Not all lenders offer these types of loans, but many do. Of course, it’s essential to understand how each type of loan works, including their eligibility requirements, before applying for one. Let’s break it down.
USDA Loans
USDA home loans, backed by the U.S. Department of Agriculture, are designed to help primarily low-to-moderate-income borrowers purchase homes in rural and semi-rural areas.
There are two different types:
USDA Direct Loans
Direct loans, as the name suggests, are issued directly by the USDA and designed for low- and very low-income single-family borrowers who may not be able to qualify for conventional financing. They can include payment assistance that lowers monthly mortgage costs based on adjusted income. These loans require no down payment, offer 33-year repayment terms (or 38 for very low-income borrowers) and, as of December 2025, interest rates are capped at 5%, which can potentially be reduced to as little as 1% using USDA payment assistance. Borrowers must earn no more than 50% (low-income) or 80% (very low-income) of the area’s median income, and the home must meet the area’s loan limits and be smaller than 2,000 square feet.
USDA Guaranteed Loans
Backed by a 90% USDA guarantee, these loans are issued by approved lenders rather than by the government agency itself. They also require no down payment, but include up-front and annual guarantee fees similar to mortgage insurance. They are all 30-year fixed-rate mortgages, and to be eligible borrowers must earn no more than 115% of the area’s median income, but there are no limits on home size or caps on the price of the home.
Eligibility Is Based On Location And Income
Both types of USDA loan are for eligible borrowers who are purchasing homes in rural or semi-rural areas—generally communities with populations under 20,000, though in some cases as high as 35,000.
The agency provides an online map to confirm property eligibility. You can also use the USDA website to help determine if you meet the income limits for the loans (which vary by loan type).
FHA Loans
FHA loans are backed by the U.S. Federal Housing Administration, and are intended for home buyers seeking an affordable primary residence who may not qualify for a conventional mortgage or cannot afford a sizable down payment. You can use an FHA loan for a property located anywhere, as long as the house meets health and safety guidelines set by the U.S. Department of Housing and Urban Development (HUD).
FHA loans are especially appealing to borrowers who have less-than-perfect credit and/or have less than 20% saved for a down payment. For this reason, they are a popular choice among people purchasing their first house, although you don’t need to be a first-time home buyer to qualify.
USDA Vs. FHA Loan Requirements
Any of these loan types will likely save you money, thanks to both the low or nonexistent down payment (depending on the loan you use) and the potentially lower interest rate compared to those of conventional mortgages. But you need to meet specific requirements to qualify for these unconventional loans.
Credit Score Requirements
- USDA: The USDA doesn’t set a specific credit score that’s needed to obtain a USDA Direct mortgage; however, lenders for USDA Guaranteed loans may want to see a credit score of at least 640, or in some cases as low as 620.
- FHA: To qualify for an FHA loan, a credit score of at least 580 is most often required. Some lenders will allow a credit score in the 500 – 579 range if you make at least a 10% down payment.
Debt-To-Income (DTI) Ratio Requirements
Mortgage lenders use your DTI ratio to verify how much of your monthly income is going to debt payments – it helps them determine whether you have room in your budget to afford the loan you’re seeking.
- USDA: For any type of USDA loan, you may need a DTI ratio no higher than 41%, although sometimes as high as 44% will be acceptable.
- FHA: FHA loans are a little more lenient in their DTI ratio requirements, with some lenders allowing for a DTI as high as 50%. In many cases, though, you’ll need a DTI that’s significantly lower (43% is ideal) to receive loan approval.
Loan Limits For 2026
- USDA: The USDA loan limit for Direct Loans ranges from $419,300 to $970,800, varying by county. Guaranteed Loans do not have a loan limit.
- FHA: For properties in lower-cost areas, the loan limit is $541,287. In higher-cost areas, such as Hawaii and Alaska, the limit is much higher: $1,249,125.
Down Payment Requirements And Closing Costs
- USDA: No down payment is required. That means you could put zero down and pay only closing costs of usually 2% – 6% (though these can vary depending on the type of USDA loan you are using).
- FHA: You’ll need to make a down payment of at least 3.5% of your loan amount.
Mortgage Insurance
- USDA: With a USDA loan, you pay what’s known as a “guarantee fee” up front at closing and then every month for the full term of your loan. The fee at closing is typically around 1% of your total loan amount, while the monthly cost after that is 0.35% of your unpaid principal balance.
- FHA: With FHA loans, you pay what’s known as a mortgage insurance premium (MIP) for the entire life of the loan, unless you make a down payment of 10% or more, in which case you can stop after 11 years. Your MIP payment will be 0.15% – 0.65% of the base loan amount each year. You’ll also have to pay 1.75% of your loan amount in up-front MIP at closing.
Income Requirements
- USDA: Direct Loans are designed for very low- and low-income borrowers, while Guaranteed Loans can be used by low- and middle-income borrowers. In both cases, the income limits on the USDA website are based on the area median income in the county the home is in. For example, your adjusted gross income can’t be more than 115% of the median household income in your area for a Guaranteed Loan. If you are using a Direct Loan, it can’t be higher than 50% to 80% of the median household income in your area. The number of household members is also taken into consideration for income eligibility.
- FHA: None. But as with other mortgages, you’ll have to prove you have a steady source of income by providing W-2s, paystubs and other financial documents. Also, FHA borrowers usually can’t spend more than 31% of their monthly income on housing costs.
Interest Rates
USDA and FHA loans both usually offer lower interest rates than you can get with a conventional loan. But the rates can vary based on a few factors, including down payment amount (if needed), credit score, loan-to-value ratio and the price of the home you want to purchase.
The interest rate on USDA Direct Loans is set by the government and sits at 5.00% – a fixed rate that lasts for the lifetime of the loan. Rates on USDA Guaranteed Loans and FHA loans will depend on the lender.
Below is a chart providing an overview of these requirements for each type.*
| USDA Loans (Direct and Guaranteed) | FHA Loan |
|---|---|---|
Minimum credit score | The USDA does not have a specific minimum credit score for either type, though lenders will often have their own requirements | 580, or as low as 500 in some cases |
Maximum debt-to-income (DTI) ratio | 41% (with some exceptions) for both types of loan | 43% (but can be up to 50% with higher credit scores) |
Loan limits | Direct: $419,300 in low-cost areas; $970,800 in high-cost areas (varies by county/state)Guaranteed: No specific loan limit | $524,255 in low-cost areas; $1,209,750 in high-cost areas |
Minimum down payment | 0% for both types | 3.5% (with a credit score of 580 or higher) 10% (with a credit score from 500 – 579) |
Up-front fees | Guarantee fee of around 1% (can vary, and can be rolled into the loan) for both types | 1.75% mortgage insurance premium |
Location requirements | Specific rural and semi-rural areas only, for both types | None |
Income limit | Borrowers cannot make more than 115% of their area’s median income for a Guaranteed Loan. With a Direct Loan, that amount drops to 80% | None |
Interest rates | Often dependent on market rate for Guaranteed Loans; 5.0% for Direct Loans (as of December 2025) | Dependent on the market rate for mortgages |
How Do I Get Approved For a USDA Or FHA Loan?
The mortgage process differs between USDA and FHA loans in several ways, from the time it takes for approval to how the appraisal process works.
USDA Approval Process
There are a few basic steps to getting approved for a USDA loan. If you are applying for a Guaranteed Loan, you’ll first need to find a USDA-approved lender; you can find a list by state on the USDA website. If you are applying for a Direct Loan, you’ll work directly with the USDA, so there’s no need to search for a lender.
In both cases, you’ll need to provide proof of income to show you meet the income eligibility requirements, along with the usual paperwork required for a mortgage application, such as tax returns and banking documents. In addition, you’ll have to get a USDA-approved appraisal to verify that the home meets all of the USDA’s Minimum Property Requirements for safety and livability.
Approval on either kind of USDA loan often takes 30 – 45 days, although, as with most home loans, the underwriting process ultimately determines the time frame. If you are taking out a Guaranteed Loan, for example, your loan must be approved twice: first by your lender and then by the USDA. Also, at any step of the process, you may be asked for more information or documentation, which may hold up your closing.
FHA Approval Process
To get approved for an FHA loan, you’ll need to provide the usual financial documents. including W-2s, income verification, paystubs and a credit report. As with a USDA loan, you’ll also be required to get an appraisal – but in this case you’ll need a specialized one known as an FHA appraisal.
The purpose of this examination of the home isn’t just to determine its value, but to make sure the property meets HUD health and safety standards. You can expect your FHA loan to close within 30 – 45 days, although again, this time frame can vary depending on your specific situation.
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Is A USDA Loan Or An FHA Loan Better?
If you’re interested in both types of loan and could qualify for either, you may be wondering which would be a better fit for you. Let’s break down some of the reasons you might lean toward either an FHA or a USDA loan.
FHA Pros and Cons
FHA loans are popular among first-time home buyers for several reasons, but like any loan, they have their downsides.
FHA Loan Pros | FHA Loan Cons |
|---|---|
There’s a lenient credit score requirement | Some down payment is required (3.5% minimum) |
They have a relatively low interest rate | They come with up-front and annual MIP costs |
| Availability for multifamily homes | Loan limits based on location |
Now, let’s take a deeper dive into a couple of reasons you might consider an FHA loan.
- You live in an urban or suburban area. USDA loans are available only to buyers in at least semi-rural areas, which severely limits where you can buy a house. An FHA loan may provide an attractive interest rate without preventing you from buying in cities or suburbs.
- You want less constrictive underwriting requirements. If you’d prefer to avoid location restrictions or the typically longer approval and closing process of a USDA loan, an FHA loan may be a better fit for you.
USDA Pros and Cons
USDA loans are designed to help primarily very-low, low- and middle-income home buyers in rural and semi-rural areas. Consider the following pros and cons of USDA loans when making your decision.
USDA Loan Pros | USDA Loan Cons |
|---|---|
There’s no down payment requirement | A higher credit score is required for a Guaranteed Loan |
There’s no mortgage insurance (although there are guarantee fees) | They’re available for single-family rural and semi-rural homes only |
| They offer the ability to finance 100% of a home’s appraised value | Eligibility is limited to borrowers below a certain income limit |
Let’s take a closer look at a couple of reasons you might choose a USDA loan over an FHA loan.
- You live in a USDA-qualified area. If you live or plan to live in a semi-rural or rural area, a USDA loan may be a perfect fit.
- You want no-money-down financing. One of the most significant benefits of a USDA loan is that you don’t have to make a down payment of any size. Only VA loans and USDA loans offer this benefit.
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FAQ
For their part, FHA loans can be appealing to buyers who want to buy in urban or suburban areas and face credit or down payment challenges.
The Bottom Line: Choosing Between USDA and FHA Loans
USDA and FHA loans are both government-backed loans that can be ideal if you are a first-time home buyer or a very low-, low- or middle-income borrower; or if you cannot afford a large down payment. Both programs offer benefits that can help you achieve homeownership sooner and more affordably than you might using a conventional loan or saving up a sizable down payment. By understanding how each loan works and weighing the pros and cons, you can make the best decision for your individual situation and family.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
