USDA vs. Conventional Loans: Which Mortgage Option Suits You Best?

When it comes to financing a home, choosing the right loan can make a significant difference in your affordability, eligibility, and future financial goals. While conventional loans are the most common choice for homebuyers, USDA loans offer attractive benefits—especially for those buying in rural areas.

At Midwest Mortgage, we’re committed to helping you make informed decisions by comparing your mortgage options side by side. In this guide, we break down the key differences between USDA loans and conventional mortgages so you can determine which one is the right fit for your unique situation.

What Is a USDA Loan?

A USDA loan is a government-backed mortgage program offered by the U.S. Department of Agriculture. It’s designed to help low- to moderate-income families purchase homes in rural and suburban areas. Because the USDA guarantees these loans, lenders can offer favorable terms like lower interest rates and zero down payment options.

What Is a Conventional Loan?

A conventional loan is not backed by any government agency. Instead, it is funded entirely by private lenders. These loans fall into two categories:

• Conforming loans, which follow the guidelines set by Fannie Mae and Freddie Mac
• Non-conforming loans, which do not follow these rules and may vary widely in terms

While conventional loans offer more flexibility in property types and locations, they often require higher credit scores and a larger down payment.

USDA Loan Eligibility Criteria

To qualify for a USDA loan, borrowers must meet specific requirements related to income, location, and creditworthiness.

1. Rural Location Requirement

USDA loans are only available for properties in USDA-approved rural or suburban areas. You can check property eligibility on the USDA’s official site. Surprisingly, many outer suburbs and small towns also qualify.

2. Income Limits

USDA loans impose income restrictions. Your total household income must be below 115% of the median income for your area. All adult members of the household are considered in this calculation—even if they aren’t applying for the mortgage.

3. Credit Score

• Minimum of 640 for automated approval
• 600–639 may qualify through manual underwriting

4. Debt-to-Income (DTI) Ratio

Lenders generally prefer a DTI ratio below 41%. Some exceptions apply with strong compensating factors.

5. Down Payment

One of the standout features of a USDA loan is that no down payment is required. This makes it an excellent choice for first-time buyers or families without significant savings.

Conventional Loan Eligibility Criteria

Conventional loans offer greater flexibility in terms of property location and usage, but they also come with stricter financial qualifications.

1. Credit Score

A minimum credit score of 620 is typically required, though a higher score can unlock better interest rates and terms.

2. DTI Ratio

While flexible, most lenders prefer a DTI ratio of 50% or lower for conventional loans.

3. Down Payment

• As low as 3% for some conventional programs
• A 20% down payment allows you to avoid Private Mortgage Insurance (PMI)
• PMI can be removed once 20% equity is built

4. Loan Limits

As of 2025, the conforming loan limit is $806,500 for most areas, but it can go up to $1,209,750 in high-cost regions.

Key Differences: USDA vs. Conventional Loans

USDA Guarantee Fee vs. Conventional PMI

Both USDA and conventional loans charge fees if you don’t meet down payment thresholds:

USDA Guarantee Fee

• 1% upfront (can be rolled into loan)
• 0.35% annually, paid monthly

Conventional PMI

• Based on loan amount and credit score
• Ranges from 0.1% to 2% annually
• Can be removed once 20% equity is reached

In many cases, USDA’s guarantee fee may be more affordable than PMI, especially for buyers with lower credit scores or minimal down payments.

Appraisal Requirements

Both USDA and conventional loans require a home appraisal to assess market value. However:

• USDA loans have stricter property condition standards
• Conventional loans are more lenient on fixer-uppers

Interest Rates and Closing Timeline

Because USDA loans are government-backed, they often come with lower interest rates than conventional loans.

However, USDA loans involve a two-step approval process (lender + USDA), which may extend your closing timeline to 30–60 days. Conventional loans can close faster, especially if you're working with an experienced lender like Midwest Mortgage.

Which Loan Type Is Right for You?

The decision between a USDA and conventional loan depends on your financial profile and homebuying goals:

Choose a USDA Loan If You:

• Have low-to-moderate income
• Plan to live in a rural or suburban area
• Want to avoid a down payment
• Are purchasing your primary residence

Choose a Conventional Loan If You:

• Want flexibility in location
• Plan to buy a secondary or investment property
• Can make a larger down payment
• Want to avoid income restrictions

Ready to Explore Your Mortgage Options?

Whether you're leaning toward a USDA loan or thinking a conventional mortgage might suit you better, our team at Midwest Mortgage is here to guide you every step of the way. We’ll help you compare rates, check eligibility, and choose the best loan program for your needs.

Apply online today and let’s help you unlock the door to your dream home.

Frequently Asked Questions (FAQs)

1. Can I use a USDA loan to buy a home in the suburbs?

‍Yes! Many suburban areas meet the USDA’s broad definition of “rural.” Always verify your specific address on the USDA eligibility map.

2. Is PMI the same as the USDA guarantee fee?

‍No. PMI is private mortgage insurance for conventional loans, while the USDA guarantee fee is charged by the USDA. Both protect the lender but are calculated differently.

3. Can I get a USDA loan if I’ve used one before?

‍Yes, as long as you meet the eligibility requirements and do not own another suitable primary residence.

4. Do USDA loans have better interest rates than conventional loans?

Generally, yes. USDA loans often come with lower interest rates because of the government guarantee, especially for lower-income borrowers.

5. How do I find out if I qualify for a USDA loan?

Start by checking if the property is in an eligible area and review your household income against the USDA’s limits. Or, better yet—contact Midwest Mortgage for a free eligibility check.