Key Takeaways
Work the programs in order of cost: USDA first if income and property qualify, then HomeReady or Home Possible at or below 80% of area median income.
USDA's map covers about 97% of the U.S. landmass, says Neighbors Bank's Ashley Harris, but ratios are tighter—29% housing, 41% total debt.
FHA is most forgiving about credit, accepting scores near 500, but its mortgage insurance usually lasts the life of the loan.
Mortgage loans aren’t one-size-fits-all. There are several types to choose from, and the right one depends on many factors — your budget, where you’re buying a home, how much you have saved up for a down payment, your credit history and more.
There are even some loan programs you might not be aware of, which is why doing your research and working with a knowledgeable lender is key before buying a home or refinancing.
Here’s how three of the most common mortgage types — USDA, FHA and conventional loans — measure up, and when you might want to choose one option over another.
USDA loans
USDA loans are mortgages guaranteed by the U.S. Department of Agriculture. They’re for use on homes in designated “rural” parts of the country and for borrowers who fall below certain income thresholds.
USDA loans require no down payment, which is one of their biggest advantages. Their debt-to-income guidelines, however, are actually on the conservative side. A standard 29% housing ratio and 41% total debt ratio, which is tighter than FHA, conventional, or VA. Borrowers can sometimes exceed those ratios with strong compensating factors, but the USDA program isn't the most flexible regarding DTI. While the 29/41 ratio is tighter than FHA and conventional loans, it is offset by the zero-down benefit. According to Home Mortgage Disclosure Act data, only 83,000 borrowers took advantage of the program in 2025 (even fewer in 2024).
“There is a big awareness gap with USDA loans,” says Ashley Harris, director of homebuyer education at Neighbors Bank. “People know about FHA and conventional loans because they are talked about everywhere. The USDA home loan program has been around since 1949, but most homebuyers don’t know it exists or think it applies only to rural farmland.”
USDA loan requirements
While you do need to buy a home in a “rural” part of the country, that definition is actually quite broad, and a large swath of the U.S. qualifies, including many suburban areas.
“With a USDA loan, you can buy a regular home in a regular neighborhood," Harris explains. "The eligibility map from the USDA covers about 97% of the US land mass — much broader than people even realize.”
Aside from buying a home in a USDA-eligible area, buyers must also meet the following financial requirements:
USDA Loan Requirements | |
Debt-to-income ratio | 29% housing ratio/41% total debt ratio (standard for automated underwriting). Can be exceeded with GUS approval or documented compensating factors, sometimes up to about 44% |
Credit score | No set USDA minimum. Varies by lender, but most require 640 |
Income | Varies by location and household size. Typically 115% or less of the area's median income |
Down payment | None |
Property | Must be in a USDA-eligible area Must be your primary residence Must meet USDA condition and safety standards |
Mortgage insurance | None, but there is an upfront fee (1% of the loan amount) and an annual guarantee fee (0.35% of the average remaining balance) |
FHA loans
FHA loans are another government-backed loan option, this time insured through the U.S. Department of Housing and Urban Development’s Federal Housing Administration.
They’re known for allowing low credit scores (as low as 500, in some cases), and the minimum down payment is 3.5%. Their big downside is that they require both an upfront and an annual Mortgage Insurance Premium (MIP), which adds to your costs as a borrower. For many, MIP lasts for the entire loan term.
“FHA is better if you're buying in an ineligible USDA area, which rules out some cities and suburbs,” Harris says. “An FHA loan works well if you have lower credit or higher debt-to-income and need that flexibility."
FHA loan requirements
Unlike USDA loans, FHA loans don’t require you to buy a home in a specific area, though the property must still be your primary residence and meet certain safety standards.
In addition to this, FHA loans have the following requirements:
FHA Loan Requirements | |
Debt-to-income ratio | 31% housing/43% total debt (standard benchmark). Automated underwriting can approve higher ratios - up to 50% to 57% with a strong profile and compensating factors |
Credit score | 500 to 580, although lenders can require higher |
Income | None |
Down payment | 3.5% if credit score is 580+ 10% if credit score is 500-579 |
Property | No location requirement Must be your primary residence Must meet FHA condition and safety standards |
Mortgage insurance | Yes. 1.75% of the loan amount upfront, plus an annual MIP of 0.15% to 0.75% (most borrowers pay 0.55%). Typically lasts for the life of the loan |
Conventional loans
Conventional loans are by far the most popular mortgages in the country. HMDA data consistently shows they make up the majority of originations, more than FHA, USDA, and VA combined.
Conventional loans aren’t backed by any government agency, and they tend to have more stringent credit score requirements than those that are. The benefit is that if you have a big enough down payment, they require no ongoing mortgage insurance or guarantee fees. These loans can also be used on any property type.
“Conventional can be a great choice if you have a down payment saved and solid credit,” Harris says. “You skip mortgage insurance faster.”
Conventional loans are much more lenient about the properties you can finance. There’s no location requirement; you can use the loans for residences, second homes, vacation property or even investments; and mortgage insurance — when required — is cancellable once you have enough equity.
Conventional loan sub-programs
If a standard conventional loan feels out of reach because of the down payment or mortgage insurance cost, two conventional sub-programs are worth knowing: Fannie Mae's HomeReady and Freddie Mac's Home Possible.
Both are built for low-to-moderate-income buyers and keep the best feature of conventional financing — cancellable mortgage insurance — while lowering the entry cost. The tradeoff is an income cap: your household income generally can't exceed 80% of the area median income (AMI) for the home's location, which you check by address using Fannie Mae's or Freddie Mac's lookup tool.
In addition to this, standard conventional, HomeReady and Home Possible borrowers also must meet the following requirements:
Conventional Loan Requirements | |||
Criteria | Standard Conventional Loan | Fannie Mae's HomeReady | Freddie Mac's Home Possible |
Debt-to-income ratio | 45% typical; up to 50% via automated underwriting with strong compensating factors; 36–45% manual | Up to 50%. | 45% automated, 43% manual |
Credit Score | 620 min.; 740+ for best rates | 620 minimum | 660 min.; 620 for 1‑unit via AUS |
Income limit | None. | ≤80% of area median income | ≤80% of area median income |
Down payment | 3% first-time, 5% repeat | 3%. | 3%. |
Property requirements | Any; primary residence not required | Primary only; 1–4 units, condos, co‑ops | Primary only; 1–4 units, condos, PUDs |
Mortgage insurance | Required under 20% down, cancelable at 20% equity; ~$30–40/mo per $100K | Same, at reduced coverage and cost | Same, at reduced coverage and cost |
Homebuyer education | Not required. | Required for first-time buyers (one buyer if co‑buying) | Required for first-time buyers (one buyer if co‑buying) |
All properties must be safe, sound and structurally secure. HomeReady and Home Possible both allow flexible income sources. Boarder and non-occupant borrower income counts toward the income cap. Gift and grant funds are allowed for down payment.
How to choose between USDA, FHA and conventional mortgages
USDA, FHA and conventional mortgages can all help you buy a house, but the costs, qualifying requirements and types of properties you can purchase vary.
A good mortgage broker or loan officer can help you determine which program meets your needs and budget best, and you can also use an online mortgage calculator to run and compare the numbers.
When in doubt, though, Harris says, “work through the programs in order of cost, starting with the cheapest option you can qualify for.”
Which loan should you look at first?
Begin with USDA. If your household income and the property are both eligible, it's usually the lowest-cost path in. If the property doesn't qualify, look at HomeReady or Home Possible, provided your household income is at or below 80% of your area's median. Above that limit, a standard conventional loan is the next stop if you have solid credit, and first-time buyers over the income limit can stay at just 3% down.
Finally, if your credit score or debt-to-income ratio is on the lower side, FHA is the most forgiving on qualifying standards. The reason it lands last rather than first is cost: its mortgage insurance usually lasts the life of the loan, making it the most expensive option over time for many borrowers. It's an excellent bridge, though — plenty of homeowners refinance out of FHA into a conventional loan once their credit and equity have grown.
"Check out USDA first, if you're eligible," Harris says. "USDA loans don't require a down payment, and rates are typically comparable to or even slightly better than conventional, depending on the market."
Your own situation can reshuffle this order. A low credit score, a specific property type or where you're buying can all change the math, so it's worth running the numbers on more than one program before you commit. A good loan officer or mortgage broker can compare your real costs side by side, and an online mortgage calculator is a quick way to double-check the difference yourself.
