FHA Loans vs. USDA Loans: Which Fits Your Needs?

The Differences Between an FHA and USDA Loan

One of the biggest challenges for many homebuyers is coming up with the money for a down payment. A down payment of 10% on a home with a purchase price of $400,000 comes to $40,000, a lot of money for many buyers.

Two mortgage options that can make the homebuying journey easier are the government-insured FHA and USDA loans. Both loan types require lower down payments, which can make coming up with the money to buy a home an easier task for cash-strapped buyers.

While both USDA and FHA loans require smaller down payments, these products are designed for different kinds of homebuyers. Here’s a closer look at the key differences between these loan types.

USDA Loans vs. FHA Loans at a Glance

An FHA loan is a mortgage insured by the Federal Housing Association. It is open to most buyers and requires a down payment as low as 3.5% of your new home's purchase price. A USDA loan is insured by the U.S. Department of Agriculture and requires no down payment. However, USDA loans are only available in certain areas and come with income limits.

Key Differences Between FHA and USDA Loans

While both an FHA and a USDA mortgage can help you buy a home with a smaller down payment, these loan types come with key differences.

Eligibility

One of the most important differences between USDA and FHA loans is who can qualify for them. FHA loans are available to most borrowers in acceptable financial standing. USDA loans are only available for borrowers with a household income of no more than 80 to 115% of the area median income, depending on type of USDA loan. They also must purchase a home in what the USDA considers a rural area. You can use the USDA’s online Property Eligibility map to determine if the home you want to buy sits in one of the rural areas that qualify for a USDA loan.

Interest Rates

The interest rate you’ll get with either an FHA or USDA loan depends on several factors, including your credit score, how much of a down payment you provide, and the term of your mortgage.

The Federal Reserve Bank of St. Louis reported that the average interest rate on a 30-year fixed-rate FHA loan stood at 5.99% as of December, 2025 , while it stood at 5.89% as of the same date for a 30-year fixed-rate USDA loan.

When comparing the costs of a mortgage, it’s important to understand the difference between a mortgage’s interest rate and its APR. A loan’s APR is a better measure of how much you’ll spend during the life of the loan, as it represents the total cost of a mortgage, including its interest rate and the closing fees that your lender will charge.

Credit Scores

You’ll need a minimum FICO credit score of 500 to qualify for an FHA loan that requires a down payment of at least 10% of your home’s purchase price, though few lenders will accept a score so low. If your FICO score is 580 or higher, though, you can qualify for an FHA loan with a down payment as low as 3.5% of your home’s purchase price.

Because private lenders originate FHA loans, you might need a higher FICO score than the minimum required by the FHA. This will vary by lender.

The USDA does not list a minimum FICO credit score for its loans. Individual lender requirements vary, but most lenders want a FICO score of at least 620. If you are a Freedom Mortgage customer, primary borrowers can check their credit score on our mobile app.

Down Payment

You can provide a down payment as low as 3.5% of your home’s purchase price if your FICO credit score is at least 580. If your FICO score is below 580, you’ll need a minimum down payment of 10% of your home’s purchase price.

USDA loans typically require no down payment, though providing one will save you money over time, as you will have to pay less interest on a smaller loan.

Appraisals

Whether you are financing your home purchase with an FHA or USDA loan, you’ll need an appraisal of the home you are buying. Your lender wants to make sure that they aren’t loaning you more money than what your home is worth.

An appraiser will visit your home, checking both its interior and exterior to determine the condition, size and layout of your home. The appraiser will also study the sales prices that buyers have paid when purchasing nearby homes similar to yours.

Loan Limits

USDA loan limits vary depending on the type. A USDA Direct loan, which comes directly from the government, has as based on the area.

With a USDA guaranteed loan, which you get through a lender, there is no loan limit. However, your lender will study your credit score, income and debts to determine how much money it is comfortable lending to you.

How much you can borrow with an FHA loan varies depending on the county in which the home you want to buy sits. In 2026, you can borrow a maximum of $541,287 with an FHA loan for one-unit properties in most areas of the country. This limit jumps to more than $1.2 million in certain high-cost areas, with a handful of very high-cost areas having higher limits.

If you want to borrow more than these amounts, you won’t be able to use an FHA loan to finance the purchase of your home. You’ll instead need to turn to a nonconforming loan such as a jumbo mortgage.

Income Requirements

There are no income requirements for borrowers applying for an FHA loan. Lenders will instead look at your income and debts when determining how large a loan they are comfortable giving you.

When it comes to USDA loans, there are limits to how much a household can earn and still qualify. The household income can’t exceed 80% of the area median income (AMI) for a USDA Direct loan, while a USDA Guaranteed loan comes with an income requirement of 115% or less of the AMI. Because the median can vary widely based on what part of the country the home is in, these income limits will also vary.

Mortgage Insurance

You'll need to pay for mortgage insurance, a type of insurance that protects your lender if you stop making your payments, when taking out either an FHA or USDA loan. These premiums, though, differ from the private mortgage insurance premium that many borrowers must pay when taking out a conventional mortgage loan that isn’t insured by a government agency.

With an FHA loan, you'll need to pay an upfront mortgage insurance premium equal to 1.75% of the amount you are borrowing. If you take out a mortgage of $300,000, you'd have an upfront mortgage insurance premium of $5,250 to pay at closing. You'll also pay an annual mortgage insurance premium each year. This premium varies according to your loan's term, the size of your loan and the amount you put down. You'll pay from .15% to .75% each year depending on these factors.

USDA loans charge an upfront and an annual guarantee fee. The upfront guarantee fee is 1% of your loan amount. If you take out a mortgage for $300,000, your upfront guarantee fee would be $3,000 at closing. The annual guarantee fee is 0.35% of your remaining loan balance, which you pay with each monthly mortgage payment.

Property Type Restrictions

You can only use FHA and USDA mortgages to finance the purchase of a primary residence, one that you live in full-time. You can’t use these mortgages to finance the purchase of an investment property or a second home.

Streamline Refinancing

If you are paying off an FHA loan, you might qualify for an FHA streamline refinance. Under this type of refinance, your lender will require less documentation than you might have to provide for other types of refinances, making the process faster and easier.

To qualify, you must be paying off an FHA loan and refinancing to another loan insured by the FHA. The refinance must provide a financial benefit, such as a lower interest rate or different term length.

If you are paying off a USDA loan, you might qualify for a USDA streamline refinance. This is like the FHA’s streamline program: You can close your new loan without providing as much paperwork as you would with a standard refinance.

As with the FHA’s version, your existing loan must be insured by the USDA and you must refinance to another USDA mortgage.

Closing Costs

Because both USDA and FHA loans are originated by private lenders, the amount you pay in closing costs will vary. But you can expect to pay from 2% to 6% of your loan amount.

These fees cover the costs incurred by your lender and other third-party providers, including title companies, attorneys and inspectors, when getting your mortgage. You might also need to prepay property taxes and pay government fees.

Pros and Cons of FHA Loans

Like all mortgage types, FHA loans come with their own set of pros and cons:

Pros

• You won’t need a high down payment.
• Borrowers can qualify with lower credit scores.
• You can use an FHA loan to finance the purchase of a home anywhere in the country, unlike with a USDA loan.
• You can refinance with less hassle with an FHA streamline refinance.

Cons

• Mortgage insurance premiums are more expensive than the guarantee fees that come with USDA loans.
• There are limits to how much you can borrow with an FHA loan.

Pros and Cons of USDA Loans

USDA loans offer a key down payment advantage, but these loans aren’t for everyone:

Pros

• You can qualify for a mortgage with no down payment.
• The USDA guarantee fees are less expensive than the FHA loan’s mortgage insurance premium.
• You can refinance with less documentation through a USDA streamline refinance.

Cons

• You can only buy a home in an area that the USDA considers rural.
• You’ll need a higher minimum credit score than with an FHA loan.
• You might earn too high of an income to qualify for one of these loans.

How to Choose Between an FHA or USDA Loan

Determining whether you should apply for a USDA or FHA loan largely depends on where you want to live.

If you want to live in a big city or a more densely populated suburban area, you’ll need to apply for an FHA mortgage. That’s because USDA loans are limited to buyers purchasing in areas of the country deemed rural by the Department of Agriculture. If you make over a certain amount or have a compromised credit score, an FHA loan is also a good choice.

If you want to buy a home in a rural part of the country and have a limited household income a USDA loan is a good option. You can take out one of these loans without worrying about scraping together the funds for a down payment.

Final Thoughts: Is a USDA or FHA Mortgage Loan Better For You?

Before deciding on a USDA or FHA loan, look at your housing goals and your financial situation. The loan that works for you will depend on where you want to buy, the strength of your credit, your income, and the amount of money you’ve saved for a down payment and closing costs. You might even decide that neither of these loans is right for you and that a conventional mortgage not insured by any government agency is the better choice.

Investigating your options? Visit Freedom Mortgage today. We can guide you through the lending process and help you find the best mortgage for your financial situation.