Two of the most popular government-backed loan programs you’ll encounter when exploring mortgage options are FHA vs. USDA loans. Both are designed to help buyers who may have difficulty qualifying for conventional loans, but they serve different purposes and have their own unique requirements.
USDA loans, backed by the U.S. Department of Agriculture, were created with homebuyers in rural and suburban areas in mind. These loans offer great benefits like zero down payment and low interest rates, however, they have fairly restrictive income limits that can make them difficult to qualify for.
On the other hand, FHA loans, insured by the Federal Housing Administration, are aimed at a broader range of borrowers. FHA loans in particular help those with lower credit scores or limited savings for a down payment, as they allow down payments as low as 3.5%. This flexibility makes FHA loans appealing for first-time homebuyers or individuals looking to rebuild their credit.
Let’s dive deeper into each to help find the best mortgage option for your goals.
Which is better, USDA or FHA loans?
Deciding between USDA and FHA loans is a critical step in your home-buying journey. The right choice depends on factors such as your desired location, yearly income, and overall financial standing.
It can be helpful to get pre-qualified for both and then go from there. You can check your USDA or FHA loan eligibility here.
USDA loans are typically more affordable than FHA loans, given their 0% down payment requirement and lack of a mortgage insurance requirement. However, qualifying for a USDA loan can be challenging due to income restrictions and property location requirements, limiting your options if you prefer urban living.
FHA loans are known for being more flexible and accessible. They are popular among first-time homebuyers and those with lower credit scores, requiring only a 3.5% down payment if your credit score is 580 or higher. While FHA loans often have higher mortgage insurance costs lasting for the life of the loan, they provide a viable path to homeownership for a broader range of borrowers, including those in metropolitan areas.
If you are a current or former service member, you may want to check your eligibility for a VA loan. VA loans typically surpass both USDA and FHA loans as the best option because they combine affordability and flexibility. VA loans offer zero down payment, no income limits, and no ongoing mortgage insurance.
FHA vs. USDA Differences
Let's take a detailed look at the criteria needed to qualify for USDA vs. FHA Loans:
| Feature | USDA Loans | FHA Loans |
|---|---|---|
| Property Eligibility | Rural/suburban areas only, income limits apply, and for primary households only | No location restrictions, more lenient credit scores, and for primary households only |
| Income Limits | $112,450 for families of 1-4, $148,450 for families of 5-8 | No |
| Interest Rates | Lower rates due to stricter criteria | Slightly higher rates than USDA but typically lower than conventional |
| Down Payment | 0% required | 3.5% minimum requirement |
| Credit Score | No USDA minimum; most lenders require 620+ | 500 with 10% down payment, 580+ with 3.5% down payment; most lenders require 620+ |
| Mortgage Insurance | 1% upfront fee, 0.35% annual fee | 1.75% upfront insurance premium, 0.15% to 0.75% annual insurance premium (varies) |
| Loan Limits | Based on income limits | 1.75% upfront insurance premium, 0.15% to 0.75% annual insurance premium (varies) |
| House Requirements | Rural properties, modest homes | Primary residences, standard condition checks |
| Appraisal | Modest homes with safety standards | Safety and livability checks |
Interest Rates
When comparing USDA vs. FHA loans, one of the most important factors to consider is the interest rate, as it significantly impacts the overall cost of your mortgage. Interest rates for both USDA and FHA loans can vary based on several factors, including your credit score, chosen lender, and market conditions.
USDA loans typically offer slightly lower interest rates than FHA loans, largely because they are designed to help borrowers purchase homes in more rural areas, where housing prices tend to be lower. As a result, the risk for lenders is reduced, allowing them to offer more favorable rates. Additionally, USDA loans often have stricter eligibility requirements, such as income limits and location restrictions, meaning fewer people qualify. This reduces competition among lenders, which can help keep rates lower.
In contrast, FHA loans are generally more accessible to a wider range of borrowers, including those with lower credit scores or limited credit histories. While these loans come with some of the most lenient qualification requirements, they also tend to have slightly higher interest rates than USDA loans. The Federal Housing Administration backs FHA loans, which reduces the lender’s risk but doesn’t eliminate it entirely. As a result, lenders will still adjust interest rates to offset the risk of offering loans to borrowers with lower credit scores.
It’s important to note that your credit score significantly affects the interest rate offered for either loan type. Lenders use your credit score to assess how likely you are to repay the loan on time. For example, if you have a high credit score (typically 700 or above), you’re more likely to qualify for a lower interest rate, regardless of choosing a USDA loan vs. FHA. If your credit score is lower (typically under 650), you might face higher interest rates, which can lead to more expensive monthly payments and a greater overall cost over time.
Down Payment
The down payment is often one of the biggest hurdles to making homeownership a reality. Here’s where USDA loans really shine, as they offer the incredible advantage of no down payment at all.
This makes USDA loans especially ideal for first-time buyers or those with limited savings, allowing them to move into their dream home without the stress of scraping together a hefty sum upfront.
FHA loans require a down payment, though it’s still relatively low at 3.5%. While much less than the down payment required for conventional loans, it still adds to your initial costs. However, some lenders offer down payment assistance (DPA) for FHA loans, meaning it may be possible to get an FHA loan with 0% down.
Get started here to learn more about Paddio’s DPA options.
Credit Score
USDA loans don’t have a set minimum credit score, but most lenders typically look for a score of at least 620. This gives you some flexibility while still ensuring you're seen as a reliable borrower. The FHA, however, does provide a set credit score minimum of 500 for FHA loans, but you must provide a 10% down payment to qualify. To qualify for a down payment minimum of 3.5%, you must have a credit score of 580+.
Keep in mind that these are minimums provided by the FHA, and that individual lenders may require higher.
FHA Mortgage Insurance vs. USDA Funding Fee
Mortgage insurance costs impact both your monthly payments and overall loan affordability. FHA loans require an upfront and annual mortgage insurance premium, while USDA loans have an upfront and annual guarantee fee. Although named differently, these fees serve the same purpose and are paid to the entities backing each loan program.
| Loan Type | Upfront Cost | Annual Cost | Paid to | Cancelable? |
|---|---|---|---|---|
| USDA | 1% | 0.35% of loan balance | The United States Department of Agriculture (USDA) | No |
| FHA | 1.75% of the loan amount upfront | 0.15% to 0.75% annually | The Federal Housing Association (FHA) | Only if you pay a 10% down payment at closing |
Income Limits vs. Loan Limits
USDA loans were created to help low- to moderate-income families, which is why they have income limits based on household size and location. This means that your total household income cannot exceed 115% of the area's median income. These limits include all adults in the household, not just those on the loan, and vary by county and state. For 2025, the standard income limits are $112,450 for families of 1 to 4 and $148,450 for families of 5 to 8.
While there’s no strict loan cap, the amount you can borrow depends on your income, debt, and the area you’re purchasing in. The better your income fits within the USDA’s guidelines, the more you may be able to borrow.
FHA loans have county-specific loan limits that vary based on local housing prices. These limits can be higher in more expensive areas, but there are no income restrictions, so your income won’t impact how much you can borrow.
House Requirements & Options
USDA loans require homes to be in rural or suburban areas and are only available for single-family homes. FHA loans don’t have limits on where you can purchase, but put limitations on the size of the loan you can get in certain areas. Additionally, FHA loans can be used on multi-unit properties (up to 4 units). Both USDA and FHA loans only allow financing for primary residences, meaning you cannot use either program for the sole purpose of purchasing a second home, investment property, or vacation home.
Both USDA and FHA allow financing for the following property types:
Condos
Manufactured homes
New construction (though it can be difficult to find lenders who will provide this option)
Appraisal Requirements
USDA and FHA loans have slightly different property standards, but both prioritize ensuring a safe and suitable home for the borrower. One way that they achieve this is by requiring an appraisal for all purchase loans.
Check Your FHA or USDA Loan Eligibility Today
Whether you're considering a USDA loan for its zero down payment and affordability or an FHA loan for its flexibility with credit scores, the right choice depends on your unique needs.
Get started online, and a Paddio loan expert will reach out to help find the best loan option for you. We're here to help you navigate the process and find the path to your new home.
