USDA vs. conventional loan: Which is right for you?

Overview - The article discusses the differences between USDA loans and conventional loans, highlighting the benefits and drawbacks of each type of mortgage [1][2][5]. Loan Types - USDA loans are government-backed, zero-down-payment home loans aimed at low-to-moderate-income individuals in rural areas [2][5]. - Conventional loans are not insured by any government agency, making them riskier for lenders and typically subject to stricter requirements [3][5]. Application Process - The application and underwriting process for conventional loans usually takes 30 to 60 days, depending on individual circumstances [6]. - USDA loans may take longer due to potential manual underwriting for applicants with credit scores below 640 [7]. Income and Credit Requirements - USDA loans have strict income limits based on household size and location, while conventional loans do not impose income caps [8][26]. - Conventional loans generally require a minimum credit score of 620, whereas USDA lenders often prefer scores of at least 640, with some accepting scores as low as 580 [9][10]. Down Payment and Lending Limits - Conventional loans may require down payments as low as 3%, while USDA loans do not require any down payment [11]. - The conforming loan limit for conventional loans in 2025 is set at $806,500, with higher limits in expensive areas [12]. USDA loan limits are generally $419,300 but can vary by location [13]. Appraisal and Insurance - Both loan types require a home appraisal, but USDA appraisers must ensure properties meet specific USDA standards [14]. - Conventional loans typically require private mortgage insurance (PMI) if the down payment is less than 20%, while USDA loans have a guarantee fee structure that includes an upfront fee and an annual fee [15][16]. Pros and Cons - USDA loans offer low interest rates, low insurance costs, and no down payment requirement, making them attractive for eligible borrowers [18]. - However, USDA loans are limited to primary residences, have income restrictions, and require properties to be in rural areas [25]. - Conventional loans provide flexibility in terms of loan amounts and types, but they come with stricter eligibility requirements and potential PMI costs [26]. Conclusion - The choice between USDA and conventional loans depends on individual circumstances, including credit score, income level, and property location [23].