VA loans and USDA loans are both amazing ways to get a mortgage with minimal fees, eliminate PMI (mortgage insurance), and finance 100% of the home’s cost.
Although both loans offer products that can, in most cases, save the buyer a lot of out-of-pocket expenses, it is essential to understand that both have separate qualifications. VA loans are offered to a population-based on the service of the Veteran. The USDA loan is for those purchasing a USDA qualifying property added to the buyer being an income qualifying buyer.
It is important for buyers to understand what they qualify for and the terms that come with each of these loans. Let’s establish an understanding of what it will cost to purchase a home using both the VA loan or the USDA loan.
VA Loan vs USDA Loan: Similarities and Differences
VA loans and USDA loans can only be used for primary home purchases. Buyers cannot use these homes as an investment property right away. There may be potential to use them as an income-producing property with future considerations, but upfront, the buyer must plan on occupying the home as a primary residence. Both loans have fees associated with them at closing. For the VA loan an amount ranging from 1.4%-3.6% of the overall loan amount, known as the VA funding fee will be an additional cost to the buyer that can be financed into the loan. The USDA loan will have a 1% guarantee fee that can be rolled into the loan amount. The VA loan does not have an annual fee, whereas the USDA loan does have an annual fee that will be paid monthly. Neither of the loans has PMI (private mortgage insurance).
VA Loan vs USDA Loan: Loan limits
VA loans for first-time use no longer have maximum loan limits! Secondary usage for eligible individuals will have a different calculation depending on many other basic qualifying guidelines to include, but not limited to; how much was spent the first time, where you are trying to execute the second VA loan, and lender qualifications. USDA loan limits will be as high as you can qualify for. Like the VA loan, the USDA loan will not have a limit on the amount that can be borrowed. Due to the USDA loan having qualifying monthly income requirements, it can be assumed when borrowers with incomes apply, the mortgage lender will work with qualified borrowers to provide mortgage options.
Jumbo VA Loan
Jumbo VA loans are when buyers start to get into the million dollar range for their home purchases. The VA jumbo loan is also backed (partially) by the government. Where buyers will need to shop around is for the actual lender. The product can be offered for high end buyers but the lender must have the ability to fund this large amount. Each lending body will be different and this is the first conversation a veteran should have with their lender. Find out what the lender’s ability to fund your larger sum is with a VA jumbo loan. In some cases these higher dollar purchases can be a showstopper for some lenders!
USDA Loan Amounts
USDA loan amounts are an endless opportunity according to the regulations of the USDA. Where you will be limited on the amount allowed to be financed with a USDA loan is your lender’s requirements. Your lender, backed by the USDA, will have you fill out the mortgage application to review income and other variables to let you know what you qualify for. This amount will allow you to search for a property to purchase using the USDA loan. USDA Direct Loans will have caps depending on the qualifying county.
Interest Rates and Loan Fees
Interest rates and loan fees for both VA loans and USDA loans will vary. Interest rates will be calculated with items considered by the lender, including purchase price, down payment, years of payoff for the loan, and other loan terms. It is essential to understand that interest rates change, and when you find a perfect home within your budget, you must lock in your rate. A VA loan will include lender fees, VA funding fee, and other closing costs (title, appraisal fees, purchasing points). USDA loan fees are very similar and include a 1% guarantee fee, a 0.35% annual fee, other closing costs, and lender fees.
Down Payment Requirements
Down payment requirements are obsolete when it comes to using both the VA loan and the USDA loan. One of the extremely exciting things for both USDA loan and VA loan users is that both entitlements can be used to finance 100% of their new home purchase. In most cases, this allows the buyer to come out of pocket with little to no money down.
Loan Programs Eligibility
Loan programs each have individual eligibility requirements.
VA Loan Eligibility Requirements
To be eligible for the VA loan, the buyer must be one of these statuses:
- Veteran must have met service length requirements,
- Currently serving members must meet time in service for a minimum period
- Certain Reservists and National Guard members
- Certain surviving spouses of deceased Veterans
USDA Loan Eligibility Requirements
- Location of your purchase will matter. You need to research if the area is deemed qualified as a rural area. You can start your search at the USDA Rural Department’s website
- Income verification and qualification will vary from state to state and county to county.
- You can look to see if you qualify by going to the USDA Rural Department’s website by filling out a single-family housing income eligibility form, configuring your adjusted household income
USDA Loan Property Eligibility
USDA loan property eligibility is determined by the United States Department of Agriculture (USDA), Rural Development Dept. Many people are not aware of all of the qualifying areas where these properties are located. It is best to check the USDA Rural Development Dept. as many are well kept secrets!
Credit Requirements
Credit requirements for each private lender will be different depending on the product they are going to offer you when purchasing your new home. Your credit score is a way for lenders to determine the risk associated with lending you money to buy the property. You can request your credit score for free prior to submitting your application on many online sites. By understanding your credit score and what is on your credit report, you can clean anything up that should not be on the report. Better credit scores indicate to lenders you are less of a risk; the higher the score, the lower the interest rate.
Income Qualifications
Income qualifications are to ensure that a buyer looks to be able to pay back a loan in the payback period that the lender terms are set for. For the VA loan, the income qualifications enable the lender to set a loan limit. For the USDA loan, income qualifications must be met to allow a buyer to take advantage of the 100% financed allowable benefits on an eligible property. These income qualifications will vary from county to county.
VA Home Loan Income Qualifications
VA home loan qualifications will be lender driven for the most part. There does tend to be more of an acceptance of what the scores look like, but there will need to be proof of income for the application. Lenders will often want to see W2s and other tax documents showing noted income on the application. Paystubs, Leave and Earning Statements (LES), bank statements, and other documents will be requested to ensure that the income supports the amount of loan, property taxes, and home insurance that will equal the monthly payment.
USDA Loans Income Qualifications
USDA loan income qualifications for your lender will be calculated by the lender looking at if your income qualifies per the county that you are trying to purchase in. Differing from the VA loan, the USDA loan has income qualifications not only to calculate the size of the loan you can receive but first it will be calculated to ensure that you qualify for the USDA loan.
Requirements for Insurance of Mortgage
Private mortgage insurance (PMI) is a mortgage insurance that will protect the lender if the buyer stops paying their loan off. PMI is not required insurance for VA loans or USDA loans. This is one reason these loan programs are such wonderful products for those that qualify. This alone will save the buyer in some cases hundreds of thousands a month and they are still not required to put a down payment on the loan.
USDA Loan Mortgage Insurance
Typically mortgage insurance is agreed upon in the loan terms until the property has a ratio of 20/80. This means that when the loan is paid down 20% leaving the 80% of the loan value still to pay. When most loans are at 20/80 the PMI can be removed. The USDA loan does not need to carry PMI. In lieu of this, they will have what is called the annual fee of .35% (FY23).
VA Mortgage Insurance
VA mortgage insurance is not a thing! The fact that only a specific population qualifies for the VA loan benefits, a veteran or qualified buyer may hear, “everyone needs mortgage insurance (PMI) if they don’t put 20% down, false! VA loans are a product that lenders offer with no PMI. Another great thing about the VA loan is that there are no hidden fees that make up for the PMI. Elimination of this PMI for VA loans is a significant benefit for those who want to put zero down.
Renovation and Rehab Loans
Renovation and rehab loans are a great option to get a VA buyer to closing and are often referred to as VA supplemental loans. If there are some issues with your purchase but they are cosmetic and not structural, this VA loan product will be a great opportunity to get the work done and financed! The work has to be completed within 4 months of the loan closure. Floors, paint, air conditioner, remodeling bathrooms barring the limit of $50,000 this option could help you fix up the home as long as you can keep it cosmetic! With a seller being allowed to contribute 4% seller credits also known as seller concessions the buyer can have some of the extra fees for this loan covered!
VA Rehab Loans
VA rehab loans can be used to help in the purchase of a “fixer-upper” using a VA loan. Talking to a lender to understand the VA loan strict guidelines will be important. There are several items that must be in place to use this loan. These supplemental loans are an awesome tool offered to VA buyers who are interested in taking a less than turn-key house and making it a move-in ready home!
VA Loan vs USDA Loan – Which is Better?
VA loan or USDA loan, this question is a question that is uniquely answered for each buyer. Understanding what you qualify for is the first step in determining which loan is best for your next purchase of a primary residence.
When looking at USDA properties and income qualifications these two items have to match qualifications of where you want to live and what your income looks like.
When using a VA loan you have more flexibility as to where you want to live and the fees are overall less if you qualify to utilize this benefit.
Both loan options are great for first time home buyers and coupled with some of the other loan types we spoke about can really help a buyer save money. Dig in and see what you qualify for. Look closely at your overall transaction and make sure to utilize the type of loan that makes sense to you. Explore all of the benefits for both of these 100% financing loans, this will save you money! Happy house hunting!
ADPI Pro Tips
- When searching using the VA loan or the USDA loan, it is possible to come out of pocket $0 ZERO dollars! Talk to your realtor and lender about local averages and estimated costs it takes to close. Once you have that number calculate seller concessions you could ask for. Seller credits are a great way to negotiate extra cash into the deal to allow the seller to pay for the buyer’s closing costs!
- VA funding fees can be reduced if you put money down. Ask your lender about how to reduce funding fee percentages tagged onto your loan with cash down. (A little money down could save you thousands on the end of your loan and in interest over time).
