Conventional Loan vs. USDA Loan

If you live in a rural community and are looking to purchase a home, you might want to consider a USDA loan versus a conventional mortgage loan. Designed for buyers of rural properties, USDA loans can sometimes offer better mortgage terms for low- to moderate-income homebuyers. However, that doesn’t mean you should discount conventional loans as a rural homebuyer.

Want to learn more about applying for a conventional loan vs. a USDA loan, including how down payments for conventional loans versus USDA loans differ? Read on for key differences in these two loan types.

Benefits and requirements of a USDA loan

One of the biggest perks of financing your rural home with a USDA loan is that you won’t have to make a down payment. USDA loans also don’t have maximum loan amounts — you can borrow as much as you can afford to repay. In addition, you can ask the seller to pay closing costs up to 6% of your loan’s value under USDA lending guidelines.

However, those benefits come with stricter qualification requirements, including the following:

• A minimum credit score of 640
• Payment of an upfront 1% guarantee fee
• Payment of annual fee equal to 0.35% of your loan amount
• Residence in an area defined as rural, though this does not mean you have to live on a farm
• Household income limit of no more than 115% of your county’s median household income
• Financed home must be a single-family home for use as your primary residence

Why you might choose a conventional loan instead

While the no-down-payment option of a USDA loan may be tempting, there are a lot of reasons to consider conventional mortgage financing instead. A conventional loan will generally require a down payment of at least 10% (unless you’re willing to pay private mortgage insurance), but you can enjoy other perks that will help you save (and even make) money in the long term:

• More competitive interest rates that could make your home purchase cheaper long term
• Slightly lower credit score requirement of 620 (though a higher score will win you more competitive interest rates)
• No guarantee or annual fee payments
• No need to live in an area the USDA defines as “rural”
• The ability to rent a house with conventional loan and use it as an income property

When considering a conventional loan versus a USDA loan, you may also want to take into account the stricter borrower requirements for a conventional mortgage, including the following:

• A minimum loan-to-value ratio of 97%
• Payment of private mortgage insurance if your down payment is 3% or less
• Loan amount limits of $647,200 in most areas if you’re applying for a conforming conventional loan

If you’d like more help evaluating the benefits and drawbacks of a conventional loan vs. a USDA loan, reach out to an OVM Financial loan expert for advice. You can also learn more about state-by-state loan guidelines, including Florida conventional mortgage guidelines, by checking out the OVM Financial blog.