
Loans backed by the Department of Agriculture are available to low- and moderate-income borrowers who want to buy in rural areas. If you are eligible for a USDA loan, you’ll want to understand how they differ from other types of mortgages, as well as their benefits and drawbacks.
Pros and Cons of USDA Loans
Here’s a look at the pros and cons of USDA loans:
USDA Loans: Pros and Cons
Pros | Cons |
Helps buyers in rural areas become homeowners. | Only available in certain locations. |
No down payment minimum. | Income limit. |
Lower mortgage insurance premium. | Upfront and annual guarantee fees. |
Competitive interest rates. | The home must be your primary residence. |
Multiple ways to pay closing costs. | You must be unable to get a conventional loan without private mortgage insurance. |
USDA Loans vs. FHA Loans
Because USDA loans and Federal Housing Administration loans both are backed by government agencies, they have different rules and eligibility requirements.
Differences Between USDA Loans and FHA Loans
USDA Loans | FHA Loans |
Usually cheaper than FHA loans. | Often more expensive than USDA loans. |
No down payment requirement. | Low down payment requirement. |
Income requirements. | No income requirement. |
No credit score requirement. | Need a credit score of at least 500. |
Upfront and annual guarantee fees. | Mortgage insurance required. |
Location restrictions. | No location restrictions. |
USDA Loans vs. Conventional Loans
Because USDA loans are backed by the government, the lender’s risk is reduced in the event that the borrower defaults. As a result, USDA loans have more generous eligibility requirements for borrowers, and mortgage lenders can offer lower interest rates compared with conventional loans.
Differences Between USDA Loans and Conventional Loans
USDA loans | Conventional loans |
No down payment requirement. | Low down payment requirement. |
Only available in certain areas. | No location limits. |
Upfront and annual guarantee fees. | Private mortgage insurance if your down payment is less than 20%. |
FAQ: Is a USDA Loan Right for You?
Here are the answers to frequently asked questions about choosing a USDA loan.