Navigating home loans can feel like standing at a crossroads. While conventional loans typically stand out for their wide availability and flexible terms and rates, lesser-known USDA loans also offer many competitive advantages—especially for those looking at rural or suburban properties.

So, let's dive into the specifics of conventional and USDA loans to pinpoint the best match for your home-buying needs.

What is a Conventional Loan?

Unlike USDA loans, conventional loans are not insured or guaranteed by the federal government. Because of this, conventional lenders typically require lendees to carry private mortgage insurance.

Let’s break down the key characteristics of a conventional loan:

Loan terms: Conventional loans typically come with loan terms of 10-30 years. They can be fixed-rate (interest stays the same for the loan duration) or adjustable rates (rates change over time).

Down Payment: While some conventional lenders may require only a 3% down payment, many ask for at least 10%. It’s worth noting that borrowers can avoid paying private mortgage insurance (PMI) on their conventional loan by putting 20% down on their home purchase.

Credit Score Requirements: To qualify, conventional borrowers should have a credit score of 620 or higher to receive the best terms and rates.

Property Type: Conventional loans can be used to purchase various properties, including single-family homes, multi-unit properties, condos, and manufactured homes.

Income and Assets: Lenders will look at your income and assets to ensure you can afford the mortgage payments alongside your other debts and financial obligations. It’s worth noting that most conventional lenders require a debt-to-income ratio of no more than 45%.

What is a USDA Loan

Unlike conventional loans, USDAs are backed by the federal government. That means the government guarantees a portion of the loan to the lender if the borrower defaults.

Now, let’s get into the specifics of a USDA loan:

Loan Terms: USDA loans typically offer a 30-year term with fixed interest rates, ensuring that monthly payments do not change over the loan's lifespan.

Down Payment: One of the primary benefits of USDA loans is that they do not require a down payment.

Credit Score Requirements: USDA loans typically require a minimum credit score of 640. That said, the USDA does not have a minimum credit score requirement, so borrowers with lower credit scores may still be eligible.

Property Type: Qualifying properties must be located in an eligible rural or suburban area as defined by the USDA. The property must also be the borrower's primary residence.

Income and Assets: Unlike conventional loans, USDAs are tailored to low and moderate-income borrowers. More specifically, borrowers’ household income cannot exceed 115% of the median income in the rural or suburban area.

It’s worth noting that while the USDA does not have a set limit on borrower assets, they look at two DTI ratios—the front-end and back-end ratios.

The front-end ratio, the projected housing cost compared to income, should generally not exceed 29%. The back-end ratio, which includes all monthly debt obligations compared to income, should typically not exceed 41%.

Which Loan is Right For Me?

Determining whether a conventional loan or USDA loan is right for you depends on several factors, including:

Location of the Property: If the home is located in a USDA-designated rural area, a USDA loan could be a good option. A conventional loan will likely be better if the property is in an urban area.

Down Payment: If you have the means to make a significant down payment, a conventional loan might be more cost-effective as you can avoid PMI. However, if saving for a down payment is a challenge, the USDA’s zero down-payment program could be a deciding factor.

Income Level: USDA loans have strict income limits based on the median income of the area and your household size. If your income exceeds these limits, you should look at conventional financing. However, remember that USDA loans are designed to make homeownership more accessible to those with low to moderate incomes.

Long-Term Plans: Consider how long you plan to stay in the home. If your home is a long-term investment, the lower interest rates of a USDA loan could save you money over time. For shorter-term ownership, a conventional loan might offer more flexibility.

JustChoice Lending: Your Mortgage Solution

At JustChoice Lending (JCL), we are a socially responsible mortgage lender providing competitive rates and personalized service. We assist clients of all income levels, including those from lower-income backgrounds, achieve their homeownership goals by improving their credit scores. Contact us today to speak with one of our mortgage experts to get started!