For many, a hurdle to buying a home is affordable financing. Two federal loan programs can make a big difference for those who qualify.
VA and USDA home loans are money-savers that charge few fees, eliminate the cost of mortgage insurance, require no down payment and finance 100% of the home’s cost. Not every borrower or property is eligible for either loan, but some homebuyers qualify for both. So, it’s important to know the benefits and drawbacks for VA loans and USDA loans.
What Are VA Loans?
VA loans are government (also called non-conforming) loans sponsored by the U.S. Department of Veterans Affairs and are limited to armed forces veterans and their spouses. Private lenders provide the financing, but the VA guarantees the debt for the lenders should the borrower default, so lenders may offer better terms than conventional mortgages.
VA loans have several benefits. There are no limits on income, credit score or mortgage amounts for borrowers, although the lender will determine how much you can borrow based on your income, assets and credit history. Unlike USDA loans, there are no location restrictions. You can only have one VA loan at a time, but there is no limit to the number of such loans you may take out in your lifetime.
What Are USDA Loans?
Like VA loans, USDA loans are government-backed. Although there are income limits, veteran status does not affect who may apply. The primary limitations are in where they can be used. These loans are available only for properties that the USDA has designated as rural areas.
USDA loans may be used to build, repair, renovate homes or buy and prepare home sites, including water and sewage systems that are more common in rural locations.
Loan Eligibility Requirements
VA loans are only available for veterans who have met service length requirements. This applies to active-duty service members as well as those who have honorably exited the service, as well as certain Reservists and National Guard members and some surviving spouses of deceased veterans.
The income qualifications for USDA loans vary by state and by county. Among the variables are household size, the number of residents under 18 years old, whether any of the applicants are 62 or older and if any disabled people are living in the household. The USDA Rural Development website has an eligibility form so you can see if you qualify.
USDA loans must be used for primary residences, not vacation homes, farms, rental or investment properties. VA loans allow you to buy up to a four-unit property. As long as you use one of those units as a primary residence, you can rent out the rest.
And the USDA definition of “rural” is generous. Many areas just outside metropolitan areas, including many towns and small cities, qualify. The USDA website has a map that shows whether areas are eligible or ineligible for USDA loans, and the vast majority of the country is eligible.
The VA requires that a home be inspected and meet minimum property requirements for a loan to be approved. The inspection includes making sure heating systems and roofing are adequate, there are no leaks in basements and crawl spaces, mechanical systems can be operated safely and there is no lead point.
The USDA sets no limits on how much you can borrow for the Single Family Guaranteed Loan, which is the most common USDA loan, but there are income limits. Since 2020, the same is true for VA loans for those who have full entitlement. Veterans have entitlement if one of the following is true:
- You haven’t used your VA home loan benefit
- You’ve fully paid off a previous VA loan and sold the property
- You’ve used your home loan benefit but had a foreclosure or short sale and fully repaid the VA.
If you don’t have full entitlement, there may be a VA home loan limit on the amount you can borrow without a down payment, and the limit is based on the county where you live.
Lenders, of course, will determine how much you qualify for based on the usual criteria: your credit rating, income and assets, for instance.
Down Payment Requirements
Good news: There are no down payments required for USDA or full entitlement VA loans. Buyers can finance 100% of their purchase.
Several factors go into setting interest rates and loan fees for USDA and VA loans. Lenders will weigh purchase price, down payment, length of payoff and other loan terms. As of Sept. 1, 2023, the interest rate for USDA Single Family Housing Direct home loans was 4.125% for low-income and very low-income borrowers.
» Learn More: Current VA Loan Interest Rates
USDA loans have stricter credit requirements. USDA lenders prefer a credit score of 640 or higher, although it is possible to get a loan with a lower score. You must wait at least three years after bankruptcy or foreclosure to apply for a USDA loan.
The VA imposes no credit score requirement on its loan but requires the borrower to have clean credit for the past year, especially with regards to a mortgage. However, lenders may have credit score minimums. Most will require a minimum credit score of 620.
If you’ve had a foreclosure or Chapter 7 bankruptcy, the VA requires at least two years from the date of discharge before you can apply for a VA loan, and that’s three years if the foreclosure involves a VA loan.
Income criteria differ between USDA and VA loans because the purpose of the USDA program is to provide home ownership opportunities in rural areas, where incomes are generally lower.
USDA loans set a maximum income limit of 115% of the median income in your area. Depending on location, the limit is as high as $110,650 for a household with one to four and $146,050 for households of five or more. Those limits may increase in areas with higher living costs.
USDA loans use two debt-to-income calculations. Concerning your proposed housing payment, the combination of mortgage principal and interest, real estate taxes, homeowner’s insurance, mortgage insurance and any homeowner’s association fees can’t exceed 29% of your stable monthly income. Your total DTI, which factors the house payment with other recurring debts, is limited to 41%.
VA loans have no maximum income limit. The VA’s DTI limit is typically 41%, but lenders may exceed it, especially if some of the income is tax free.
There are, of course, insurance and fees involved, as with any mortgage. The two governmental entities calculate that differently.
VA loans have a VA funding fee, which is a one-time, upfront charge added to the loan amount. The fee amount varies based on the size of the loan, what type of loan it is, whether it’s a first-time loan, the down payment amount. and the kind of veteran. There is no monthly insurance premium on VA loans.
The USDA adds an upfront mortgage insurance premium that is 1% of your base loan amount. Additionally, there is an annual premium of 0.35% of your loan amount. On a $250,000 loan, the annual premium would be $875.
Renovation and Rehab Loans
Maybe you want to fix up your home rather than buy a new one, or you’d like to buy a fixer-upper and need the funds to make that happen. There are VA and USDA loans for that.
The VA has a specific mortgage program to renovate and repair a home, either by purchasing or refinancing an existing loan. If you buy a house in substandard condition, a VA rehab loan provides money for both the purchase and renovation.
Under the program, there are two ways your loan amount is calculated. One is the market value the property would have after purchase and renovation. The other, called acquisition cost, is the combined purchase price and renovation cost, which includes a contingency of up to 15% of the renovation costs and permit, inspection and title update costs. The loan amount will be the lower of those two calculations, and you can borrow up to 100% of that figure.
The USDA Section 504 Home Repair program provides loans to very-low-income homeowners to repair or improve their homes or grants to elderly very-low-income homeowners to remove health and safety hazards. To qualify, you must be the homeowner and occupant, be unable to get other affordable credit and have a low income. For grants, you also must be 62 or older. As with all USDA loans, the home must be in an eligible area.
The maximum loan is $40,000, and the maximum grant is $10,000. They can be combined for up to $50,000 in USDA assistance.
Which Is the Best Option – VA Loan or USDA Loan?
Of course, VA and USDA loans aren’t the only mortgage options out there. Depending on your circumstances, they may not even be the best. Look into conventional and FHA mortgages before deciding. The allure of VA and USDA mortgages is the 100% financing, which allows you to buy a home and even upgrade it without spending money up front.
For those who qualify, a VA loan may be the best choice because there are no income restrictions, and you can borrow higher amounts. If your income is low to moderate and are willing to live outside urban areas, USDA loans may suit you best.
About The Author
In his 40-plus-year newspaper career, George Morris has written about just about everything -- Super Bowls, evangelists, World War II veterans and ordinary people with extraordinary tales. His work has received multiple honors from the Society of Professional Journalists, the Louisiana-Mississippi Associated Press and the Louisiana Press Association. He avoids debt when he can and pays it off quickly when he can't, and he's only too happy to suggest how you might do the same.
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