USDA vs. conventional loans: What's the difference?

If you’re looking to finance your home, you may hear that a conventional loan is the most common mortgage option. But if you live in a rural area or have a low-to-moderate income, you may want to consider a USDA loan. Rocket Mortgage doesn’t currently offer USDA loans, but we can help you evaluate your options when it comes to home lending.

Before you apply for a mortgage, we’ll outline the key distinctions between USDA and conventional loans. This comprehensive guide compares these two loan types to help you determine if a USDA loan or a conventional loan is right for you.

Key takeaways:

• USDA loans are government-backed, no-down-payment loans for homes located in eligible rural areas.
• Conventional loans are the most common loan type and have no location restrictions but require a down payment.
• USDA loans can be good if your area is eligible, and you have a low-to-moderate income, while conventional loans can be good if you can afford a higher down payment.

USDA vs. conventional loan basics

Before we dive into the detailed differences between these two loan types, let’s start with the basics of USDA and conventional loans.

USDA loans

USDA loans are subsidized by the U.S. government and backed by the U.S. Department of Agriculture. In other words, the USDA takes responsibility for paying the lender back if you default on your mortgage.

Since the USDA is taking more of the risk, your lender can typically offer you a lower interest rate. Ultimately, government-backed loans make it more affordable for lower-income households to buy a home.

Conventional loans

Unlike USDA loans, conventional mortgages aren’t insured by the U.S. government. There are two types of conventional loans – conforming and non-conforming.

Conforming loans are purchased by two government-sponsored enterprises, Fannie Mae and Freddie Mac, so they have to meet Fannie Mae’s and Freddie Mac’s guidelines. On the other hand, nonconforming loans don’t have the same requirements as conforming loans, such as loan limits, eligibility requirements, and other features.

USDA vs. Conventional loan eligibility summary

Let’s look at the eligibility differences between USDA and conventional loans.

USDA vs. conventional loan eligibility in detail

Now that we’ve covered the basic differences between a USDA and a conventional loan, let’s look in depth at these loan types.

Location

One of the biggest differences between conventional and USDA loans is the location requirement, specifically for USDA-eligible properties.

• Conventional loans: A conventional loan is available nationwide, whether you live in a major city or a small town. As long as you qualify based on credit and income standards, you can get a conventional loan.
• USDA loans: USDA loans are available only in eligible rural areas as determined by the USDA. If you’re located in a major metropolitan area, you likely won’t be able to get a USDA loan.

Some suburban areas are considered rural, while others aren’t. A general rule of thumb is that areas with a population of 35,000 or less are considered “rural.” However, this varies, so it’s important to check the USDA eligibility map to see if your area or home is an eligible rural area.

Residence type

Conventional loans are less restrictive on the type of residence you can get a loan for, whereas USDA loans have stricter requirements.

• Conventional loans: You can get a conventional loan for several reasons, including buying or refinancing your primary residence, second home, or investment property.
• USDA loans: These loans can only be used on your primary residence. Even though it must be located in an eligible rural area, your property can’t be a working farm.

Income limits

USDA loans have income limits, while conventional loans don’t.

• Conventional loans: There are no income limits for conventional loans.
• USDA loans: USDA loans have specific income limits, depending on the home’s location, the number of people in your household, and the area median income (AMI). To meet the income requirements, your household income must not exceed 115% of the AMI. Additionally, income requirements include all adults who live in the house, not just the adults listed on the mortgage.

Credit requirements

USDA loans typically accept lower credit scores compared to conventional loans, although credit score requirements vary by lender.

• Conventional loans: The credit score requirements for conventional loans vary by lender and the type of loan you’re getting. There is no longer a minimum credit score threshold for conventional loans, but some lenders still expect to see a credit score of 620. A higher credit score could give you better interest rates and terms.
• USDA loans: To be eligible for a USDA loan, you must have a credit score of at least 640 for automated approval. With a credit score of 600 – 640, you’ll have to go through manual underwriting, where an underwriter thoroughly reviews your finances.

Debt-to-income ratio

When lenders assess your ability to pay back your loan, they also look at your debt-to-income ratio (DTI). Your DTI represents the amount of your monthly income that goes toward paying off recurring debt.

• Conventional loan: The DTI requirements for conventional loans vary depending on the loan specifics and the borrower’s credit score and finances. In general, most lenders want to see a DTI below 36%, but some may accept up to 45%.
• USDA loan: To qualify for a USDA loan, most lenders typically want to see a DTI no higher than 41%. Borrowers with a credit score of 680 or higher may be approved with a DTI no higher than 44%.

Down payment requirements

Conventional and USDA have different down payment expectations, which can influence which loan is right for you.

• USDA loan: These loans don’t require a down payment because the government backs them, so lenders can issue USDA loans with no money down. This can be a great advantage if you don’t have the funds for a down payment. However, keep in mind that you’ll still need to pay closing costs on a USDA loan.
• Conventional loan: You can qualify for a conventional loan with a down payment as low as 3%.¹ Keep in mind that if your down payment is under 20%, you’ll be required to pay for private mortgage insurance (PMI). PMI increases your monthly mortgage payment, but it may be the right trade-off to buy a home sooner.

PMI won’t be on your loan forever; it’s canceled when you have enough equity in your home. You can ask your lender to remove PMI once you’ve paid 20% of the purchase price.

Loan limits

USDA loans don’t have loan limits, while conventional loans do, which could impact your home-buying budget.

• Conventional loans: Fannie Mae and Freddie Mac set loan amount limits for conforming conventional loans. The conventional loan limit for 2026 is $832,750. In some high-cost areas, the loan limit is higher – up to $1,249,125, depending on the county.
• USDA loans: There typically aren’t loan limits for USDA loans, but lenders usually won’t approve the loan if it’s something you can’t afford.

Approval process

The approval process timeline varies slightly between USDA and conventional loans, so let’s compare.

• Conventional loan: The approval process typically takes 30 – 45 days, from application to closing day. Sometimes it can take up to 60 days.
• USDA loan: Getting approved for a USDA loan might take slightly longer than a conventional loan. The USDA loan needs to be approved by both the lender and the USDA. The entire process from application to closing can take approximately 30 – 60 days.

USDA vs. conventional loan fees

Now that we’ve covered the differences between USDA and conventional loan eligibility requirements, let’s take a closer look at the fees you’ll be required to pay.

Private mortgage insurance and guarantee fees

USDA loans and conventional loans both have fees you’ll need to pay, but this depends on a few factors.

• Conventional loans: If your down payment is less than 20%, you’re required to pay PMI. The fee is based on your loan-to-value ratio (LTV) and credit score and generally ranges from about .1% – 2% of the unpaid loan amount. Typically, the lower your down payment, the higher your PMI.
• USDA loans: On the other hand, USDA loans require you to pay a guarantee, or funding, fee. This fee is paid at closing and is an ongoing monthly cost. The upfront fee, paid at closing, is 1% of the loan amount. Each year, you’ll pay .35% of the scheduled unpaid principal balance of the mortgage. The annual fee is split over 12 months and paid as part of your monthly payment.

Appraisal costs

A home appraisal is an unbiased estimate of the fair market value of a home, ensuring you don’t overpay for the home. Both USDA and conventional mortgages require an appraisal.

• Conventional loans: With conventional loans, the buyer typically pays for the appraisals. The cost ranges from $300 to $1,000 and depends on factors such as the home’s location, size, and comparable properties.
• USDA loans: The appraisal cost for a USDA loan is a flat fee of $775. Properties generally have to meet stricter requirements than homes financed with a conventional loan.

Available interest rates

Outside of the down payment, one of the biggest appeals of a USDA loan is the lower interest rate.

• Conventional loans: The current 30-year fixed mortgage rate is 6.625%. Conventional loans are typically higher than government-backed loans since there is more lender risk involved.
• USDA loans: The current interest rate for USDA loans is 5%. In many cases, interest rates for USDA loans are lower than rates for conventional loans.

The bottom line: USDA loans are not available everywhere

If you’re buying a home in an eligible rural area, a USDA loan can be a great option to consider. On the other hand, conventional loans are available everywhere but require a down payment and typically a higher credit score. At the end of the day, the right loan option comes down to your finances and where you want to live.

If a conventional loan is the right option, you can start the application process with Rocket Mortgage.

¹ The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

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