USDA Loans Vs. VA Loans: What’s the Difference?
Want to avoid making a down payment and pay a lower mortgage interest rate? Your best options are USDA loans and VA loans. These represent two of the most generous financing choices available to eligible borrowers. But while you might not qualify for one, you could be eligible for the other.
Let’s break down the USDA loan vs. VA loan differences, including USDA loan benefits, regarding criteria like eligibility, mortgage insurance, and more.
A USDA home loan is a fixed-rate mortgage backed by the U.S. Department of Agriculture’s Rural Development division. Designed for low- and moderate-income borrowers, especially first-time buyers, these loans help folks purchase or refinance homes in eligible rural and suburban areas approved by the USDA. Known as Section 502 loans, named for the section of the 1949 Housing Act that authorized them, the program offers rare benefits like zero-down financing, competitive rates, and more flexible qualification standards. Thanks to the USDA’s guarantee on a portion of each loan, lenders can extend funding affordable to buyers with modest credit scores, making homeownership more accessible.
There are two main types of USDA home loans: direct and guaranteed.
USDA Direct Loans are government-funded loans for low-and very-low-income borrowers to buy, build, or repair modest homes. They offer benefits like reduced rates, long terms, and possible payment assistance.
USDA Guaranteed Loans, issued by private lenders but backed by the USDA, serve moderate-income buyers. While they don’t offer payment subsidies, they provide no-down-payment options, competitive interest rates, and flexible approval guidelines. Both loan types also feature lower mortgage insurance costs than conventional and FHA loans, offering rural buyers an affordable path to homeownership.
Now, let’s explore the different qualification rules for USDA loan eligibility, including requirements related to income limits, designated locations, mortgage insurance, and more.
As mentioned, USDA loans do not require a down payment, making homeownership more affordable and accessible to many modest-earning borrowers. However, individual lenders of guaranteed loans can set their own down payment policies.
“This is helpful for buyers who have not saved a large amount of cash but yearn to own their own home,” Anthony Sharp with Sharp Realty Group explains.
Consider that conventional loans require a down payment of at least 3%. If you put down less than 20%, you must pay private mortgage insurance (PMI), which costs 0.3% to 1.5% of your original loan amount per year. There are several situations under which you can cancel PMI. For example, according to the Consumer Financial Protection Bureau, “You have the right to ask your servicer to cancel PMI on the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.” Because loan balances go down gradually over time, it can take many years to reach the 80% benchmark.
With USDA loans, you don’t technically pay PMI. But you must pay a one-time Upfront Mortgage Insurance Premium (UFMIP) (1% of your loan amount) and a small annual Mortgage Insurance Premium (MIP) (0.35% of your outstanding balance per year). Note that these USDA fees are required regardless of your down payment amount, and monthly charges continue for the life of the loan.
Your USDA property must be located in an eligible rural or suburban area (you can check for properties on USDAloans.com’s online property eligibility map). USDA financing is restricted to single-family primary residences only, and the property must be safe, sanitary, modest, and suitable for living in; the home can be a detached or attached residence, including a manufactured home, but properties like vacation homes, income-producing residences, and farms are not allowed.
“The USDA also has strict income caps, which vary by area,” notes Andrew Lokenauth, a personal finance expert. “You won’t qualify if you earn over 115% of an area’s average income, as the USDA calculates. Also, in most counties across the country, the new income limit for a one- to four-person household has been increased from $112,450 to $119,850, while a five- to eight-member household can earn a maximum of $158,250.”
A VA purchase loan is a mortgage backed by the U.S. Department of Veterans Affairs (VA) but offered by private lenders, including banks, mortgage companies, and credit unions. This financing is designed to help those who have proudly served and defended our country. That means only Veterans, active duty service members, and certain surviving spouses are eligible to purchase a home with this loan. The perks include no down payment required, no PMI, less strict credit standards compared to conventional mortgages, competitive interest rates, and limits on the closing costs lenders can charge.
Qualifying borrowers must meet different eligibility requirements based on various criteria. Most current service members qualify after 90 continuous days of active duty.
Eligibility for Veterans depends on service era: Those serving from August 2, 1990, to the present must have either 24 continuous months of service or the full period of active duty they were called for (at least 90 days); however, Veterans discharged due to a service-connected disability may qualify with fewer days.
Earlier service periods have similar thresholds, typically 90 to 181 days, depending on the era. Reserve and National Guard members may be eligible after 90 days of non‑training active duty, or six creditable years of service (with honorable discharge or continuation). These rules ensure that most applicants who've served honorably for at least three months of active duty are eligible.
You’ll also need a Certificate of Eligibility (COE), an official document from the U.S. Department of Veterans Affairs that validates whether you qualify for a VA home loan by confirming you’ve met the required military service or surviving spouse qualifications.
Here’s a closer look at the different rules involved with VA loans:
“VA loans, like USDA loans, also offer 100% financing with no down payment needed. This is a big advantage for Veterans and active-duty military,” adds Sharp.
Of course, this zero-down benefit is earned through service time, as detailed above. However, it remains one of the strongest benefits of a VA loan.
The good news is that you won’t pay PMI with a VA loan. On the other hand, VA loans come with a funding fee unless the borrower is exempt, typically due to service-connected disabilities.
This funding fee is a one-time charge paid at closing that spans between 0.5% and 3.3% of your loan amount. First-time users commonly pay 2.15% with no down payment, but you can lower this fee to 1.5% if you make a down payment between 5% and 9.99%. Repeat users are on the hook for 3.3% if they make no down payment, though the same lower rates apply for larger down payments.
Another advantage is that VA financing can be used in any location so long as the home is safe and livable: This includes urban, suburban, or rural areas. Remember that the USDA loan only requires living in a designated rural or suburban area. You can use a VA loan to buy different types of primary residences, from single-family houses to condos to two- to four-unit properties (so long as you live in one of the units), as well as new construction homes and manufactured homes. Investment properties and vacation homes are off-limits.
Here’s a handy chart that makes it easier to compare USDA vs. VA loans:
| Category | USDA Home Loan | VA Home Loan |
|---|---|---|
| Down payment requirements | No down payment required (0% down). You can finance 100% of the appraised value, even covering closing costs if the appraisal exceeds the purchase price. | There is no down payment required (0% down), making it ideal for those who do not have savings for upfront costs. |
| Income requirements | Household income must not exceed 115% of the area median income, varying by location and family size. Currently, in a typical county, a family of four must earn under $119,850 to be eligible, for example. | There are no income limits. Eligibility is based on military service, not income, so high earners can still qualify. |
| Credit score requirements | Many lenders prefer a 640 minimum, but some accept lower scores (e.g., 620) with compensating factors like stable income or low DTI. Direct Loans may be more lenient. | There is no strict minimum, but most lenders look for 620–640. VA considers the full financial profile, offering more flexibility for lower scores. |
| DTI ratio requirements | Typically capped at 41%, but up to 44% with strong credit (680+), cash reserves, or stable employment. | More flexible, often up to 41–45%, with some lenders allowing higher DTIs if residual income is substantial. |
| Property location eligibility | Must be in a USDA-eligible rural or suburban area, per the USDA’s property eligibility map. Properties must meet safety and habitability standards. | No location restrictions – available nationwide. Must meet VA’s Minimum Property Requirements for safety and structural integrity. |
| Mortgage insurance requirements | No private mortgage insurance (PMI). Instead, a 1% upfront guarantee fee (can be rolled into the loan) and a 0.35% annual fee, paid monthly. | No PMI or annual fees, which saves on monthly costs compared to USDA. |
| Funding fee requirements | 1% upfront guarantee fee, financeable. An annual fee of 0.35% applies for the life of the loan. | VA funding fees range from 0.5%-3.3%, depending on down payment and prior VA loan use. It can be financed through the loan. |
| Loan limits | No set maximum, but limited by the borrower’s repayment ability and area income limits. Typically supports modest homes. | No loan limits for first-time VA loan users with full entitlement. Limits apply for subsequent loans if the entitlement is reduced. |
| Occupancy requirements | Must be the borrower’s primary residence. No vacation homes or investment properties. Must move in within 60 days. | Must be the primary residence. No investment properties, but more flexibility for multi-unit properties (up to four units). |
| Closing timelines | Often takes 45-60 days due to the USDA's rural appraisal requirements and potential funding delays. | Typically 30-45 days, faster than USDA due to no geographic restrictions or federal funding delays. |
| Interest rate differences | Competitive, often lower than conventional mortgages. | Generally lower than USDA rates, saving thousands over the loan term. |
| Eligibility for Veterans/service members | This is not specific to Veterans. It is open to anyone meeting income and location criteria, including U.S. citizens or qualified non-citizens. | Requires military service (e.g., 90 days active duty during wartime, 181 days peacetime, or 6 years in Reserves/National Guard) and a Certificate of Eligibility. |
| Other key differences | Stricter appraisal standards due to a rural focus. Can finance closing costs up to 100% of the appraised value. | More refinancing options, including cash-out refinances. No income-based restrictions. |
To summarize, USDA financing offers a few pluses over VA loans:
Then again, VA financing promises the following upsides:
Before committing to any mortgage loan, it’s a good idea to carefully assess your financial situation, including your earnings, credit score, monthly budget, and readiness for a down payment. While it’s fantastic that both USDA and VA loans offer zero down, other factors, including monthly and annual fees, should also impact your decision.
“Compare the total costs. The USDA’s annual fee lasts for the life of your loan, while the VA’s funding fee is a one-time but higher upfront cost,” says Glick.
If you qualify for a VA loan, it will likely offer better long-term value due to no mortgage insurance and broader property choices, suggests Sharp.
“However, if you don’t qualify for a VA loan but meet USDA guidelines, the USDA loan option still provides excellent terms for zero-down financing,” he continues.
Think carefully about your future and how long you plan to remain in your property.
“Refinancing rules, the ability to assume the mortgage, and longer-term goals for your property could tilt the decision one way or the other,” adds Shirshikov.
The VA mortgage loan can offer more value than a USDA loan because, while both require no down payment, you can purchase a home anywhere with a VA loan, won’t worry about income limits, and will likely pay a lower interest rate. USDA loans require buying a home in an eligible rural or suburban area and meeting stricter income requirements. However, only Veterans, active-duty military members, and eligible surviving spouses qualify for a VA loan. These military eligibility rules do not apply to USDA loans.
According to mortgage expert Steven Glick, you would need enough income for a $400,000 VA loan to cover the monthly payment and meet debt-to-income (DTI) requirements. At a 5.990% interest rate (the current average), a 30-year VA loan with a 2.15% funding fee (for first-time use with no down payment) means the loan amount would be $408,600 (including the fee). Your monthly principal, interest, and estimated property taxes and insurance might total around $2,750. With a 41% DTI cap, you would need a gross monthly income of around $6,707, or roughly $80,500 annually.
Buyers usually pay closing costs on their USDA loan, including appraisal fees, title insurance, and lender fees, averaging around 2% to 5% of the loan amount. However, a USDA loan allows you to finance these costs into the mortgage if your home appraises above the purchase price. Sellers can also cover up to 6% of the sales price as concessions, and gift funds from family or nonprofits are allowed with a USDA gift letter included.
The USDA’s 20% rule is a guideline to ensure the program targets buyers who genuinely need zero-down financing. If you have liquid assets, such as cash in savings or checking, that exceed 20% of the home’s purchase price, you may be required to use some of these funds toward the purchase or closing expenses. Case in point: on a $200,000 home, liquid assets over $40,000 could trigger this 20% rule.
