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Conventional Loan vs USDA: Compare Two Powerful Homebuying Programs

USDA home loans can help you become a homeowner.

While USDA home loans make up a tiny fraction of the U.S. mortgage market, they are a powerful tool for first-time buyers.

This government-backed mortgage requires no down payment and offers lower mortgage insurance rates than most conventional loans. So how do these two programs stack up in these and other attributes?

Conventional vs USDA Down Payment

USDA Loans: Zero down
Conventional: Minimum 3% down for first-time buyers

As mentioned, the most attractive feature of USDA loans is that they require no down payment. On a $300,000 home, that saves the buyer $9,000 out-of-pocket.

Conventional vs USDA Mortgage Insurance

USDA Loans: 1.0% upfront (financeable) and 0.35% of the loan amount per year
Conventional: No upfront mortgage insurance; monthly amount varies depending on down payment and credit score

While USDA loans have an upfront mortgage insurance fee of 1.0%, the monthly cost is usually less than that of conventional loans.

At 0.35% per year, USDA loan mortgage insurance costs $29 per month per $100,000 borrowed. This applies to all credit score levels.

Conventional loan mortgage insurance, or PMI, is less predictable. Your cost is zero if you put 20% down. But assuming less, your cost can be anywhere from $23 to $155 per month, per $100,000 in loan amount (10% down with a 760 score versus 3% down with a 620 score).

USDA typically wins out in this category unless you have great credit and a strong down payment.

Geographic Restrictions

USDA Loans: Home must be within the U.S. and in an area defined as rural
Conventional: 50 U.S. states, D.C., Virgin Islands, Guam, Puerto Rico

USDA loans are meant to encourage homeownership in rural areas. As such, you can only get one in areas outside of major metros.

But don’t assume your area is ineligible. USDA works in many cities and towns even if they don’t feel rural. If you’re looking at buying a home, search USDA’s eligibility map to see if the home is eligible for zero down.

Income Limits

USDA Loans: 115% of the area's median income
Conventional: No income limits except for some 3%-down loans

In most areas of the country, you can make up to $110,650 per year to be within USDA income limits, and much higher in other areas. In Madison, Wisconsin, for instance, you can have a household income up to $138,300.

Conventional loans generally have no income limits except for select 3%-down loans, for which borrowers must make 80% or less of the area's median income.

Credit Score

USDA Loans: No stated minimum, but lenders usually want 600-640
Conventional: 620

USDA does not publish a minimum credit score but leaves it up to lenders to decide what they will accept. Some require 580, while others want a 640 score. If a particular lender can’t approve your application because of your credit score, apply with a different lender.

Fannie Mae and Freddie Mac, the two major conventional loan agencies in the U.S., publish a minimum score requirement of 620. That is, unless you have no score at all, then you might still qualify.

Debt-to-Income Ratio

USDA Loans: 29%/41%; 32%/44% with compensating factors
Conventional: 43%/43%; 50%/50% with compensating factors

Debt-to-income, or DTI, is the measurement of monthly debt service costs compared to gross income.

For example, someone with $10,000 per month in income and $5,000 in monthly debt payments has a DTI of 50%.

DTIs are split into two categories:

  • Front-end ratio: Housing debt (including things like taxes and insurance) versus income.

  • Back-end ratio: Housing plus all other debt payments versus income.

Someone with a $10,000 income, $3,000 all-inclusive house payment, and a $1,000 car payment would have 30%/40% ratios.

USDA loans prefer a 29% housing ratio and 41% overall ratio, but can go higher with compensating factors.

Conventional loans don’t differentiate between front and back-end ratios. If you have no car payment, student loans or other debt, your housing payment can be up to your DTI maximum.

Overall, conventional loans are more lenient about DTI than USDA loans.

Loan Limits

USDA: No stated loan limits; loan is limited by income maximums
Conventional: Around $750,000 for 1-unit homes in 2024

If you need a big loan, conventional is the better financing option. You can get a loan up to $750,000 for 2024 (final loan limits are still pending) for a 1-unit home or even higher in high-cost areas.

There are no stated maximum loan limits for USDA loans because you are not eligible above a certain income. DTI maximums limit loan size.

Interest Rates

USDA: 0.25-0.50% lower than conventional

USDA loans are government-backed. There is generally little risk to the end investor in the case of borrower default. The government pays back any losses due to foreclosure.

Because of this, lenders can offer USDA loans at lower rates, despite lower down payment and credit score standards than conventional loans require.

Which Loan Is Better For You?

There’s no single loan that is best for everyone. That’s why there are so many mortgage options in the marketplace today.

Find a knowledgeable lender that can run scenarios for all loan types to see which one is best for your situation.

About The Author:

Tim Lucas spent 11 years in the mortgage industry and now leverages that real-world knowledge to give consumers reliable, actionable advice. Tim has been featured in national publications such as Time, U.S. News, MSN, The Mortgage Reports, My Mortgage Insider, and more.

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