Are you considering purchasing a home but aren’t sure if a VA loan or USDA loan is the best route for you? This article discusses the difference between these loan options, the benefits, and eligibility requirements.
What is a VA Loan?
VA home loans are provided by private lenders to military service members, eligible veterans, and eligible surviving spouses to purchase a home, complete home improvements, or refinance a mortgage. These home loans are backed by the United States Department of Veteran Affairs which guarantees a portion of the loan to the lender if the borrower defaults on the loan.
Benefits of a VA Loan
Since VA loans are guaranteed by the government, mortgage lenders can offer flexible loan terms regarding income and credit requirements. They are often known to have reasonable monthly mortgage payments. The most common loan benefits include:
- No Down Payment
- No Private Mortgage Insurance
- Competitive Interest Rates
- Lenient Credit Requirements
- Limited Closing Costs
- No Maximum Loan Amounts
- No Penalties for Early Payoff
Eligibility Requirements for a VA Loan
You may qualify for a VA loan if you meet one or more of the following requirements:
- You served 90 consecutive days of active service during wartime.
- You served 181 days of active service during peacetime.
- You have 6 years of service with the National Guard or Reserves or served 90 days (minimum of 30 days consecutively) under Title 32 orders.
- You are the spouse of a service member who died while serving or due to a service-connected disability.
What is a USDA Loan?
A USDA loan is guaranteed by the USDA Rural Development Guaranteed Housing Loan Program which is a part of the United States Department of Agriculture. Eligible applicants can purchase, build, rehabilitate, improve, or relocate to a home as long as it is in an eligible rural area. This type of loan is best known for its zero-down-payment mortgage.
Benefits of a USDA Loan
The benefit most commonly associated with a USDA loan is that it does not require a down payment whereas FHA loans require a 3.5% down payment. Below is a list of the most common benefits of a USDA loan:
- No Down Payment
- No Maximum Loan Amounts
- No Minimum Credit Score Requirement (Varies By Lender)
- Ability to Finance Closing Costs
Who Qualifies for a USDA Loan?
Eligible applicants must meet the following requirements to qualify for a USDA loan:
- Be a US Citizen or Permanent Resident
- Must Meet Income Eligibility
- Must Be the Primary Residence
- Proven History of Dependable Income
- Property Must Be in an Eligible Area
VA Loan vs USDA Loan Requirements
For ease of understanding, below is a chart that compares VA loans and USDA loans side by side.
| VA Loan | USDA Loan | |
| Eligible Properties | Primary Residence Only | Primary Residence Only/ Eligible Rural Properties |
| Minimum Credit Score | Not Set by VA | Not Set by USDA |
| Debt to Income Ratio | Not Set by VA | <41% |
| Down Payment | 0% | 0% |
| Loan Limits | No Limit | $336,500 – $970,800 |
| Mortgage Insurance | No | Required if Down Payment is < 10% |
| Fees | Closing Costs and Funding Fees | Closing Costs |
Explanation of Loan Requirements
Eligible Properties
VA loans are only approved for primary residences. They may cover two homes if the veteran stays at each property for a minimum of six months out of the year.
USDA loans are only approved for primary residences in approved rural areas. You can check to see if homes are in a qualified area here.
Debt to Income Ratio
The debt-to-income ratio or DTI is the sum of all monthly debt payments divided by the gross monthly income. This is how lenders judge if you will be able to successfully pay the mortgage. Similar to the credit scores, the VA does not have a DTI requirement but individual lenders do.
The requirement for USDA loan lenders tends to vary from 36% to 50% with the goal being less than 41%.
Loan Limits
VA loans do not have loan limits unless the borrower has defaulted on a loan before or if they have two or more VA loans out.
USDA loans have a limit of $336,500 but it can be increased to $970,800 in high-cost areas.
Mortgage Insurance
VA loans do not require mortgage insurance whereas USDA loans can require it. If you have less than 10% of a down payment, then you will be required to have mortgage insurance on a USDA loan. This is added protection for the lender.
Fees
VA loan fees are closing costs plus a VA funding fee that ranges from 0.5% to 3.6% of the loan amount.
USDA loans have an annual fee of 0.35% of the loan amount.
VA Loans with VA Loans for Vets
If you are an active duty service member, veteran, or surviving spouse you may qualify for a VA mortgage. If you are looking to purchase a home but are not sure if you qualify, check your eligibility today or contact the VA Loans for Vets team at (602) 908-5849 to begin the process.
