USDA Loans vs. FHA Loans: How They Compare
There are many mortgage loan options from which to choose, but USDA and FHA financing are often the best choices for those with limited incomes or who are buying their first house.
Both are government-backed, offering low entry barriers, low rates, and affordable closing costs. They also have looser credit and income requirements than other loan programs, allowing a larger swath of borrowers to take advantage of them.
But you only need one loan to buy a house. So, which one is best — a USDA loan or an FHA mortgage? Though USDA loans tend to be more affordable than FHA loans, the right answer depends on your goals, housing market, and finances. Keep reading for more guidance.
This is where USDA and FHA loans diverge the most. With USDA loans, you can get 100% financing — meaning your loan can cover the entire price of the home, no down payment required. This is ideal for borrowers who have little stowed away and don’t want to spend years scrimping and saving before they can buy a house.
FHA loans, on the other hand, require at least 3.5% down — and that’s only if you have a 580 credit score or higher. If your score is lower than that, you’ll need 10% upfront. On a $300,000 home, for example, a borrower with a credit score above 580 would pay $10,500 versus $30,000 upfront for someone with a credit score of 579 or less.
USDA and FHA loans require mortgage insurance — both upfront and annually. This insurance protects lenders and in exchange allows FHA borrowers to purchase with little down, generally 3.5%. This is far less than the 20% down that most lenders require without insurance.
The upfront mortgage insurance premium (the upfront MIP) can be added to the loan amount. This reduces your need for cash at closing. The annual mortgage insurance premium (the annual MIP) is part of the monthly mortgage payment.
With FHA loans, the upfront MIP is equal to 1.75% of the loan amount. Most FHA borrowers – those who purchase with less than 5% down and have 30-year financing – will also have a .55% annual MIP.
USDA loans have slightly lower insurance costs. Premiums are just 1% of the loan amount upfront and 0.35% annually. In both cases, you’ll usually pay annual premiums for the life of the loan.
For many borrowers, the location of the house you’re buying will determine whether you can use a USDA or FHA loan. That’s because USDA loans are guaranteed by the U.S. Department of Agriculture and are designed to spur development in more rural parts of the country. For this reason, only homes in specific geographic areas can be financed with a USDA loan. You might be surprised at how many suburban communities qualify, so check the department’s eligibility map to determine if a home you’re considering is USDA-eligible.
FHA loans don’t have location requirements, so you can buy a home anywhere you like and use this type of financing. The one exception is with condo units. Only some condo communities are approved for purchase by the FHA. Use this FHA condo search tool to find some eligible communities in your area.
An important note: Both FHA and USDA can only be used to buy a primary residence. If you’re looking to buy a second home or investment property, you’ll need to use an alternative loan program.
The qualifying requirements for FHA and USDA loans are slightly different, and they can vary based on the specific lender you choose.
Generally speaking, you’ll need at least a 640 credit score to qualify, while FHA loans will sometimes allow scores down to 580 or even lower. Derogatory credit issues like bankruptcies, foreclosures, collections, and judgments can all hurt your application, though again, it depends on the lender.
As for your finances, you’ll need to fall under a certain income threshold to get a USDA loan, as these are designed for only low- and medium-income earners who don’t have other mortgage options. These thresholds are set at 115% of the county’s median income and vary based on household size. You will also usually need a 41% debt-to-income ratio or lower.
FHA loans have no income ceilings, but you will usually need a DTI of 43% or lower to qualify. Some lenders, however, go higher under certain circumstances.
Both FHA and USDA loans are designed to cover modestly priced housing, but there are no outright loan limits with USDA mortgages as long as you meet the program’s financial requirements.
FHA loans, however, are capped. The exact limits vary by location and home size, but in most parts of the country, the maximum FHA loan amount is $524,225 for a single-family home in 2025. In higher-cost markets, it can go up to $1,209,750. These limits change every year based on local home prices.
To see if an FHA or USDA loan is better for your home purchase, let’s look at a real-life scenario.
Here’s how USDA and FHA loans would compare on a $300,000 home purchase with a 30-year term and 6.5% interest rate.
| USDA | FHA | |
|---|---|---|
| Minimum down payment | $0 | $10,500 |
| Upfront fee | $3,000 | $5,066 |
| Monthly principal and interest | $1,896 | $1,829 |
| Monthly mortgage insurance | $87 | $205 |
| Total monthly payment | $1,983 | $2,034 |
As you can see, there’s a notable difference in mortgage insurance costs, which results in slightly different monthly payments (about a $50 difference per month). That can add up to a lot over the life of your loan — around $18,000 on a 30-year term.
For this reason, if you’re considering a house that is located in a USDA-approved area and falls under the required income limits, a USDA loan may be a better choice. If not, an FHA is likely to be your next best option.
USDA loans and FHA loans are used only for primary residences, and borrowers can only have one prime residence at a time. You’ll need a conventional loan or other type of mortgage to finance a second home or investment property.
FHA loans tend to be easier to qualify for than USDA loans. They have lower credit score minimums and do not have income limits, whereas USDA loans do.
No, neither USDA nor FHA loans have prepayment penalties. You can pay off your loan whenever you like after closing.
USDA loans have slightly lower mortgage insurance costs than FHA loans — both upfront and annually. Over time, a USDA loan can save you a lot in insurance costs alone.
Yes, you can get down payment assistance with these loans. Check with your local and state housing departments, and ask your loan officer, too. There are many programs for which you may be eligible.
