When you decide to buy your home, you will see that there are many mortgage options available to you. Some of these are government-backed loan programs that make it easier for first-time homebuyers to access the property ladder. Among them, two popular choices are USDA loans and VA loans. Both are government-backed and aim at making home acquisition easier and more affordable, particularly for mid-income households. However, they target different market segments.
Let’s break down the USDA vs VA loan differences and similarities to help you determine which is a better fit for your situation.
About USDA Loans
They are designed to promote homeownership in rural and some suburban areas. If your work allows you to live in a suburban setting, then these loans are a great option, particularly as they are geared toward low to moderate-income borrowers.
About VA Loans
VA loans are available to eligible veterans, active-duty service members, and certain surviving spouses. This program was established in 1944 as part of the GI Bill to help returning service members purchase homes and make their transition to civilian life smoother and easier.
VA loans come in several forms, such as purchase loans to buy a home or cash-out refinance loans to refinance an existing mortgage and take out cash.
Key features of VA loans include no down payment requirement, no private mortgage insurance, competitive interest rates, and more flexible credit requirements. They also have a main benefit: the VA funding fee can often be financed into the loan amount.
USDA Loan vs VA Loan
Eligibility requirements
To be eligible for a USDA loan, applicants must meet several criteria that vary by location and household size. For example, the household income must not exceed 115% of the area’s median income. Also, the home must be located in an eligible rural area as defined by the USDA. Many suburban areas may qualify as well.
On the other hand, VA loan eligibility is primarily based on military service. To be eligible, you must have 90 consecutive days of active service during wartime, 181 days of active service during peacetime, or 6 years of service in the National Guard or Reserves. The surviving spouse of a service member who died in the line of duty or as a result of a service-connected disability is also eligible. To qualify for a VA loan, the borrower must obtain a COE to prove to lenders that they qualify for a VA loan.
Credit score requirements
USDA loans require a minimum credit score of 640. However, this requirement can be flexible, and some lenders may accept lower scores with compensating factors like significant cash reserves or proof of consistent employment.
The VA doesn’t set a minimum credit score requirement. However, many VA lenders look for a credit score of at least 620. Some may go as low as 580, especially if the borrower has a strong overall financial profile.
Debt-to-Income Ratio (DTI)
The USDA prefers a DTI of 41% or lower. In some cases, they may allow a higher DTI with compensating factors that will mitigate the credit risk.
The VA is generally more lenient with DTI ratios. While they prefer a DTI of 41% or lower, they may approve loans with DTI ratios above 50% if the borrower meets residual income requirements.
Property value limits
USDA loans have no limits on the property value but the loan amount must fall within the income and loan limits for the area.
The VA doesn’t set a cap on how much you can borrow. However, there are limits on the amount of liability the VA will assume, which can affect the amount you’re able to borrow without a down payment. If you want to buy an expensive home, you will be required to cover the difference between what the VA lends you and the asking price for the home.
Down payment requirements
USDA loans require no down payment for qualified borrowers. This is especially helpful for first-time homebuyers who often lack the liquidity to finance a down payment.
Like USDA loans, VA loans also offer 100% financing, meaning eligible borrowers can purchase a home with no down payment.
Interest rates
USDA loans offer competitive interest rates, which can be lower than those for conventional loans, thanks to the government backing.
VA loans feature some of the lowest interest rates on the market, often lower than either conventional or USDA loans.
Income limits
USDA loans have income limits that vary by location and household size. These limits are there to verify that the loans serve low to moderate-income households.
There are no income limits for VA loans. However, income is a crucial factor in determining the loan amount for which a borrower can qualify. A higher amount means you can buy a more expensive home.
Geographical limits
USDA loans are limited to properties in areas designated as rural by the USDA. This includes many suburban areas on the outskirts of cities and most of rural United States.
There are no geographical restrictions for VA loans. They can be used to purchase properties in urban, suburban, or rural areas across the United States.
Mortgage insurance
USDA loans require an upfront guarantee fee and an annual fee, which are similar to mortgage insurance but often lower than conventional loan PMI.
VA loans don’t require ongoing mortgage insurance. However, most borrowers must pay a one-time VA funding fee, which can be rolled into the loan amount. This lowers the financial impact of buying a home.
Choosing Between USDA and VA Loans
Both USDA and VA loans are government-backed, but they serve different purposes and have different eligibility requirements. USDA loans are focused on geographical areas and income levels, while VA loans are based on military service.
This makes USDA loans a great option for low- to moderate-income buyers looking to purchase in rural or suburban areas. On the other hand, VA loans, with their flexible credit requirements and no ongoing mortgage insurance, can be a fantastic choice for military personnel.Â
If you don’t qualify as a VA, VA loans are out of reach. If your ideal home is in a city center, then a USDA loan is not the right choice. To weigh the pros and cons of USDA loan options, consider location, income limits, and mortgage insurance requirements.
USDA and VA Mortgage Lender
The best loan for you is one that fulfills your homeownership needs and expectations and falls within your budget limits and future plans. If in doubt about your options, contact Society Mortgage, and one of our loan officers will help you choose the best loan for your situation. Call us today and get started on your home-owning journey!
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Frequently Asked Questions
Which is better, USDA or VA loan?
The choice depends on your eligibility and needs. VA loans are ideal for veterans and military service members because they offer no down payment, flexible credit, and no mortgage insurance. On the other hand, USDA loans are ideal for low- to moderate-income borrowers in rural or suburban areas as they have no down payment. They do, however, have geographical and income restrictions.
