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USDA loan vs. VA loan: Which is right for you?

Yahoo Personal Finance· Getty Images
4 min read

When you’re eligible for multiple government home loans, you have the benefit of choosing what’s best for you in terms of costs, terms, and mortgage lenders. Veterans and active duty members who want to buy a home in a rural area could have multiple options. In addition to VA loans, they may qualify for USDA loans.

We’ll compare the eligibility and costs of both government mortgage programs so you can decide between a USDA loan versus a VA loan.

Learn more: Types of mortgage loans

In this article:

USDA loans are mortgages that are either guaranteed or directly issued by the U.S. Department of Agriculture. USDA loan interest rates are typically lower than conventional loan rates, similar to how federal student loan rates are usually lower than student loan rates through private lenders. Although, just like with student loans, you should compare rates among mortgage types and lenders.

USDA loans have no down payment requirements, but they do have income limits, and you will have to verify your income. You’ll pay a guarantee fee (which is like USDA mortgage insurance) of 1% of the loan amount at closing, then an annual guarantee fee of 0.35%.

Minimum credit score requirements vary among mortgage lenders but generally start in the lower 600s. Borrowers might be able to mitigate the credit score requirement with income dependability and strong personal finances.

Read more: The credit score needed to buy a house

The VA loan program helps eligible veterans, active-duty service members, and surviving spouses buy homes without a down payment. The U.S. Department of Veterans Affairs insures the mortgage, but you apply for them through private lenders.

You’ll pay a one-time funding fee of 1.25% to 3.30% of your loan amount at closing, but there isn’t an annual fee like with USDA or other types of loans.

Read more: VA funding fee exemption — How it works and who qualifies

There can be benefits to choosing a USDA loan over a VA mortgage. Here are some factors to consider:

  • Not limited to certain military personnel. You don’t have to be an eligible veteran, active-duty service member, or surviving spouse. This may be important for veterans who don’t meet the minimum military service time to use a VA home loan.

  • Interest rates. Both VA and USDA loans have relatively low interest rates — one type of mortgage doesn’t always have a lower rate than the other. Compare mortgage rates among loan types and mortgage lenders.

VA loans have their own perks too. Here are a few reasons you might prefer one over a USDA loan:

  • No income limits. There isn’t an income cap for a VA home loan. USDA loans have income limits based on the county and other factors, such as the number of people in the home. For instance, a family of one to four people in certain counties only qualifies if they earn $112,450 or less, then the limit umps to $148,450 for families of five to eight.

  • No location restrictions. There are no restrictions on the city, town, or county where you can buy a home with a VA loan. USDA loans are limited to properties in eligible rural areas.

  • No annual fee. There is no annual or monthly fee for VA loans, whereas USDA loans have a 0.35% annual guarantee fee divided by 12 and paid monthly.

Read more: Best VA loan lenders

Whether a VA or USDA loan is better depends on your circumstances and where you want to live. VA loans allow qualifying veterans, service members, and surviving spouses to live anywhere in the country. USDA loans are for low-to-moderate-income home buyers in rural areas.

If you live in a rural area and fall within the household income limits, a USDA loan can be a great idea. You may get a lower interest rate than with a conventional loan or another type of mortgage. However, rates can vary, and you should compare all available options.

In many ways, getting approved for a VA loan is easier than other types of mortgage loans — they have no minimum down payment and flexible credit score requirements. However, only certain military personnel are eligible.

This article was edited by Laura Grace Tarpley