USDA Loans Vs. Conventional Loans: What’s the Difference?
If you prefer living in the country or a rural suburban location, USDA loans offer fantastic value. That’s because, among the many USDA loan benefits, you won’t have to put any money down, and interest rates are typically less than what other loan types charge.
But USDA financing isn’t your only option. Instead, you could opt for a conventional loan, which is more widely offered, has fewer restrictions, and might be easier to get, but requires at least a small down payment.
Given a choice between USDA and conventional loans, which one is right for you? Let’s explore the major differences between these choices and compare the pros and cons.
A USDA home loan is a mortgage backed by the U.S. Department of Agriculture (USDA). It’s intended for low- to moderate-income borrowers who want to purchase homes in designated rural or suburban areas.
Because USDA loans are backed by a government guarantee, lenders have less risk. That means they will finance with zero down and often lower interest rates.
“With a USDA loan, you are getting government backing, which means lenders can offer better terms, such as no down payment and lower mortgage insurance costs,” notes Steven Glick, director of mortgage sales for Ziffy Mortgage. “This loan is part of the USDA’s Rural Development program, aimed at making homeownership affordable in less urban areas.”
Unlike VA, FHA, or USDA financing, a conventional loan is not insured or guaranteed by the government. Most conventional loans, but not all, follow the guidelines set by Freddie Mac or Fannie Mae. These loans commonly require higher credit scores and income when compared with USDA financing. They also require a down payment of at least 3%, although you will pay private mortgage insurance (PMI) if you put down less than 20%.
The cost of PMI is usually shown separately from monthly mortgage and principal payments. However, in some cases, there can be Lender-Paid Mortgage Insurance (LPMI). There is no separate charge for PMI with LPMI financing. However, in such situations, the borrower pays a higher interest rate. In effect, the lender is self-insuring the mortgage. Here’s a helpful breakdown of the important distinctions between these two loans:
| Category | USDA Home Loan | Conventional Home Loan |
|---|---|---|
| Down Payment Requirements | No down payment is required (0% down). You can finance 100% of the home’s appraised value, sometimes even covering closing costs if the appraisal exceeds the purchase price. | Typically requires at least 3% down for conforming loans. PMI is required if less than 20% down. |
| Income requirements | Household income must not exceed 115% of the area’s median income, varying by county and household size. For example, in many counties, limits range from $119,850 for 1-4 members to $158,250 for 5-8 members. All household income counts, even from non-borrowers. | No income limits. Lenders focus on your ability to repay based on income stability and debt-to-income ratio. |
| Credit score requirements | Many lenders prefer a 640 FICO score, but some accept lower scores (e.g., 620) with manual underwriting or compensating factors like stable income or savings. There is no strict minimum credit score for USDA Direct Loans. | A minimum of 620, but higher scores (680+) often secure better rates and terms. Stricter underwriting for lower scores. |
| Debt-to-Income (DTI) ratio requirements | Standard DTI is 29% (housing expenses) and 41% (total debt), but can go up to 44% with compensating factors like high credit scores or reserves. | Typically, 43% or lower, but up to 50% may be allowed with strong credit or other factors. More flexible for high-income borrowers. |
| Property location eligibility | Must be in a USDA-eligible rural or suburban area. Check eligibility with the USDAloans.com property eligibility map. Properties must meet safety and habitability standards. | No location restrictions. Can be used for properties anywhere, urban or rural. |
| Mortgage insurance requirements | No PMI. Instead, a 1% upfront guarantee fee (can be rolled into the loan) called the Upfront Mortgage Insurance Premium (MIP) and a 0.35% annual fee (paid monthly) for the life of the loan. | PMI is required if the down payment is less than 20%, typically 0.3%-2% annually. PMI can be canceled once 20% equity is reached. |
| Loan limits | No set loan limit for USDA Guaranteed Loans, but loan amounts are capped by income, DTI, and local market conditions. USDA Direct Loans have area-specific limits. | The 2025 conforming loan limit is $806,500 for most areas, but it is higher for high-cost areas or non-conforming (jumbo) loans. |
| Occupancy requirements | Must be the borrower’s primary residence. Must move in within 60 days of closing. No vacation homes or investment properties. | Can be used for primary residences, second homes, or investment properties. More flexible. |
| Closing timelines | Typically, the USDA loan closing timeline is 45-60 days due to the USDA’s additional review process. Can be delayed if USDA funding is low or during high demand. | Usually 30-45 days, faster since no government review is required beyond standard underwriting. |
| Interest rate differencs | Often 0.5%-0.75% lower than conventional rates due to government backing. | Rates vary by credit score, DTI, and lender. Higher credit scores can yield better rates. |
| Other key differences | Stricter property standards (e.g., no income-producing buildings like barns). Only 30-year fixed-rate terms for Guaranteed Loans; Direct Loans offer 33-38 years for low-income borrowers. | More flexible property types (e.g., multifamily , condos). Offers adjustable-rate mortgages and terms like 15, 20, or 30 years. Can refinance to remove PMI. |
Let’s drill down deeper into each of the major criteria charted above to better understand the benefits and disadvantages of USDA vs. conventional loans.
Again, you are not required to make a down payment on a USDA loan. However, be aware that USDA mortgages come in two flavors: direct loans funded by the government and intended for low- and very-low-income borrowers, and guaranteed loans offered by private lenders. These private lenders may set their own down payment requirements.
“USDA loans are popular because of the zero down payment feature, which is a huge benefit for buyers who have steady income but have not saved a lot yet,” explains Anthony Sharp with Sharp Realty Group. “Conventional loans, on the other hand, usually require at least 3% to 5% down. And if you want to avoid paying mortgage insurance, you’ll need to put at least 20% down.”
Here’s another key difference: With a USDA loan, you are not eligible if you earn over 115% of an area’s average income, as calculated by the USDA.
“There is no official minimum income requirement for USDA or conventional loans, but you will have to demonstrate that you have some regular income and an ability to make your mortgage payments,” says Martin Orefice, CEO of Rent To Own Labs. “Most conventional lenders will require two years of income history if you have had the same job for that whole time, and longer histories from people with less reliable income.”
In a nutshell, USDA financing is designed for purchasers earning a low to moderate income, but there’s no income limit for conventional loans, which means higher earners may have more flexibility with loan size and property type.
Many lenders prefer a credit score of 640 or higher to be eligible for a USDA loan, although there is some flexibility with compensating factors. DTI is not necessarily the end-all, be-all when it comes to mortgage qualification.
“Conventional loans, meanwhile, often require a minimum credit score of 620, although higher scores usually mean better interest rates and lower costs,” Sharp continues.
You can use a conventional mortgage loan to pay for just about any type of residence located anywhere. However, USDA loans are only available for primary residences, usually in rural or suburban areas, and only to borrowers who meet the maximum income requirements. Additionally, your USDA property must meet habitability and safety standards.
“On a conventional loan, you’ll be on the hook for private mortgage insurance if you put down less than 20%, and you’ll keep paying this until you get to a 20% equity position. This can be reached through a combination of paying off your loan and benefiting from property value increases,” Orefice adds.
Although you don’t technically pay PMI for USDA loans, you will have to pay a one-time Upfront Mortgage Insurance Premium (MIP) (1% of your loan amount) as well as a small annual fee (0.35% of your outstanding balance per year).
Conventional loans follow set loan limits determined by Fannie Mae and Freddie Mac. These can change annually and vary by county. Currently, the conventional loan limit is $806,500 throughout most of the country.
“Even though USDA doesn’t set official loan limits, your loan size will depend on what you can afford based on income and local housing costs,” Sharp points out.
USDA loans typically take a little longer to close: usually between 45 and 60 days. After your lender green-lights your file, it still needs to be reviewed and signed off by the USDA. Conventional loans often close more quickly (30 to 45 days, on average). That’s because there’s no extra government layer of approval involved.
“Thirty days is a good minimum closing time to expect for both loan types,” says Orefice.
USDA loans are usually a great fit for those with modest incomes seeking to buy in rural or suburban locations.
“If you are tight on savings and cannot manage a down payment, the zero down option is ideal for you. They’re also great for folks with credit scores around 640 or slightly lower, since USDA loans are more forgiving and offer lower interest rates thanks to government backing,” explains Glick. “For instance, a family earning $50,000 a year in a rural county with a 640 credit score could slide into homeownership more easily with a USDA loan.”
Additionally, USDA loans provide a better chance for first-time homebuyers to qualify for a mortgage. Since USDA loans require no down payment, first-time homebuyers who do not have a lot of money saved up for a down payment can still become homeowners.
On the other hand, conventional loans work better for borrowers with credit scores of 620 or higher who can afford a down payment of at least 3% – although putting down more than 20% is generally needed to avoid paying PMI costs.
“Conventional loans are perfect for those with stable incomes and no upper-income limit, whether you plan to buy in a city, suburb, or rural area. You can finance a condo, second home, or even an investment property with conventional loans – unlike USDA loans, which do not allow this.”
If you have a credit score of 680 or higher and 10% saved for a down payment, you’ll probably score a more competitive USDA loan rate and go through the application process more easily.
It’s smart to carefully compare the variances between conventional and USDA financing so that you can make a more informed decision. Now that you have a better grasp of these two loan choices, take the time to shop around among several lenders and get prequalified.
Eager to take advantage of the many benefits of USDA loans? Speak with a USDA loan specialist for personalized guidance.
It depends on your financial situation and where you are looking to buy. A USDA loan can be better if you meet the income limits, plan to purchase in a rural or suburban area, and want to avoid a down payment. USDA loans typically offer lower interest rates and reduced mortgage insurance costs compared to conventional loans.
On the other hand, conventional loans offer more flexibility, especially if you have a higher income, want to buy in an urban area, or need to finance a second home or investment property.
The “better” option really comes down to your goals, credit profile, and the type of home you want.
Yes, but with some conditions. The property must be habitable and meet USDA safety and structural standards when you purchase. Minor repairs are allowed, and you can opt for a USDA Rehabilitation and Repair Loan under the Guaranteed Loan program to cover these expenses. But if the home needs major work, like a new foundation or roof, it might not pass the USDA appraisal unless repairs are completed before closing. Conventional loans are often recommended for fixer-uppers that require major repairs because the property standards for this loan are less strict.
The commonly recommended USDA loan process includes:
Refinancing a USDA mortgage may lower your monthly payments or improve loan terms. You can refinance a current USDA loan into a new USDA loan via a rate-and-term or streamlined refinance so long as you have lived in your home for at least a year. You must still meet income and property qualification requirements, and the home must continue to be your primary residence.
