The main differences between conventional and USDA loans are eligibility and how long mortgage insurance lasts.
USDA loans allow 0% down with a 1% upfront fee and a 0.35% annual fee for the life of the loan, but only in eligible areas and under income limits. Conventional loans need 3% to 5% down, and their PMI can be cancelled as equity builds.
USDA usually wins on upfront cash, while conventional can cost less over a long hold for buyers with strong credit, or be the only option for those who don’t meet USDA requirements. Pricing both is the best next step.
What is the difference between a conventional loan and a USDA loan?
A USDA loan, formally the Single Family Housing Guaranteed Loan, is backed by the U.S. Department of Agriculture’s Rural Development agency to support homeownership in eligible rural and suburban areas.
A conventional loan has no government backing; most follow rules set by Fannie Mae or Freddie Mac. Private lenders make both loans.
USDA’s government guarantee is what allows 0% down. In exchange, borrowers pay a guarantee fee for as long as they keep the loan, and both the property and the household must meet USDA eligibility rules.
Conventional loans ask for some money down and charge private mortgage insurance (PMI) under 20% down, but that insurance can be removed later. Learn more about first-time buyer loan options.
How do USDA and conventional income and location rules compare?
USDA limits both location and household income, while standard conventional loans limit neither. That is the first filter to check, because if the property or household does not qualify for USDA, the comparison ends there.
How do the income limits compare?
USDA caps total household income at 115% of the area median income (AMI), the midpoint income for the county. As of the July 2026 update, GMFS Partners claims the standard limit in most counties is $122,800 for households of one to four people and $162,100 for households of five to eight, with higher limits in higher-cost areas.
USDA counts income from every adult who will live in the home, even if they are not on the loan.
Standard conventional loans, including Conventional 97 and Freddie Mac HomeOne, have no income limit. Fannie Mae HomeReady and Freddie Mac Home Possible do have one, generally 80% of AMI, but they offer reduced mortgage insurance pricing in exchange.
Only the borrowers’ income counts toward those conventional limits.
How do location rules compare?
USDA loans are available only in eligible rural and suburban areas shown on USDA’s online eligibility map, which is updated periodically. Many eligible areas are small towns and outer suburbs, not only farmland. Conventional loans have no location restriction beyond county conforming loan limits.
“Buyers who are near the USDA income limit should check early, not after they find a house. A raise, a bonus, or an adult child moving back home can change the answer, and conventional is the natural fallback when that happens.”
— Charlie Cooper, President, Austin Capital Mortgage
How do USDA and conventional down payment requirements compare?
USDA requires less cash upfront: qualifying borrowers can buy with 0% down, while conventional loans require at least 3% down for qualifying first-time buyers through Conventional 97, HomeReady, Home Possible, or HomeOne, and 5% for most other buyers.
USDA also allows closing costs to be financed into the loan when the home appraises above the purchase price.
On a $300,000 purchase, the minimums compare as follows. These figures are for illustration only and are not an offer of credit.
- USDA: $0 down
- Conventional at 3% down: $9,000
- Conventional at 5% down: $15,000
USDA has no set maximum loan amount; the loan size is limited by your income and ability to repay. According to the We are Calculator, the 2026 baseline conforming limit for conventional loans is $832,750, with higher limits in high-cost areas.
How does the USDA guarantee fee compare with PMI?
The USDA guarantee fee lasts for the life of the loan, while conventional PMI can be cancelled once you build enough equity.
For fiscal year 2026, USDA charges an upfront guarantee fee of 1% of the loan amount, usually financed into the loan, and an annual fee of 0.35% of the remaining balance, paid monthly. Conventional loans have no upfront mortgage insurance fee.
Conventional PMI is priced by credit score and loan-to-value ratio (LTV), which is your loan balance divided by the home’s value. With 3% or 5% down, PMI is often higher than USDA’s 0.35% annual fee at the start, especially at lower credit scores. The difference is what happens later:
- USDA: The annual fee stays for the life of the loan; the usual way to remove it is to refinance into a loan without mortgage insurance.
- Conventional: Borrowers can request PMI cancellation once the balance reaches 80% of the home’s original value, and PMI ends automatically at 78% if payments are current.
This is why the comparison often depends on how long you keep the loan. USDA tends to cost less in the early years. For a buyer with strong credit who stays long enough for PMI to drop off, conventional can cost less over the full life of the loan.
“The USDA fee is small, but it never leaves. With a 740 score and 5% down, PMI can come off in a matter of years. I show buyers both timelines, because the cheaper loan in year one is not always the cheaper loan in year ten.”
— Charlie Cooper, President, Austin Capital Mortgage
How do USDA and conventional credit and debt rules compare?
USDA and conventional loans both lean toward borrowers with fair to strong credit, but they use scores differently. USDA has no official minimum score; its automated system, the Guaranteed Underwriting System (GUS), generally needs a 640 or higher for streamlined approval, and many lenders set USDA minimums of 620 to 640.
Conventional loans no longer carry a hard 620 floor in Fannie Mae’s automated system, but many lenders still require 620, and conventional pricing and PMI rise noticeably at lower scores.
For debt, debt-to-income ratio (DTI) is your total monthly debts divided by gross monthly income. USDA’s standard ratios are 29% for housing costs and 41% for total debt, with some room above that for strong files.
Fannie Mae’s automated system can approve conventional loans with DTI up to 50%, so conventional often gives more room for buyers with student loans or car payments.
How do waiting periods after bankruptcy or foreclosure compare?
USDA generally requires three years after a Chapter 7 bankruptcy discharge or a foreclosure. Fannie Mae generally requires four years after a Chapter 7 discharge and seven years after a foreclosure, with shorter periods possible for documented extenuating circumstances. Buyers with a recent credit event may reach USDA eligibility sooner.
How do USDA and conventional property rules compare?
Conventional loans allow more property types and uses, while USDA is limited to single-family primary residences in eligible areas. The key differences:
- Occupancy: USDA is for primary residences only. Conventional loans also allow second homes and investment properties.
- Number of units: Conventional loans allow one- to four-unit homes. USDA guaranteed loans are for single-family homes and do not allow income-producing properties.
- Current homeownership: USDA generally requires that you not already own a home that meets your needs in the area. Conventional has no such rule.
- Appraisal: USDA appraisals must show the home meets minimum property standards for safety and soundness. Conventional appraisals focus mainly on value and marketability, and some purchases qualify for an appraisal waiver.
- Seller concessions: USDA allows sellers to contribute up to 6% of the sales price. Conventional allows 3% with less than 10% down, 6% with 10% to 25% down, and 9% with more than 25% down.
- Assumability: USDA loans can be assumed by a qualified buyer with approval. Most conventional loans cannot be assumed.
For a related comparison, see FHA vs USDA loans for first-time homebuyers.
How do conventional and USDA loans compare, and when does each make more sense?
Conventional and USDA loans differ most on eligibility, down payment, and how long mortgage insurance lasts. The table below summarizes typical program guidelines as of 2026; lender requirements vary.
| Factor | Conventional loan | USDA loan | Which may fit better |
|---|---|---|---|
| Location | Anywhere, subject to conforming loan limits | Eligible rural and suburban areas only | Conventional if the home is outside a USDA eligible area |
| Household income limit | None for standard programs; about 80% of AMI for HomeReady and Home Possible | 115% of AMI; standard $122,800 for 1 to 4 people | Conventional if household income is over, or close to, the USDA limit |
| Minimum down payment | 3% for qualifying first-time buyers; 5% standard | 0% | USDA if you have little saved and want to keep cash for reserves or move-in costs |
| Credit score | No hard floor in Fannie Mae DU; many lenders require 620+ | No USDA minimum; 640+ for GUS streamlined approval | USDA often in the 640 to 700 range; conventional in the mid-700s or higher |
| Upfront fee | None for mortgage insurance | 1% upfront guarantee fee | Conventional if you want no upfront insurance cost |
| Ongoing mortgage insurance | PMI under 20% down, priced by credit and LTV | 0.35% annual fee | USDA usually costs less in the early years, especially at lower scores |
| Removal | Request at 80% of original value; automatic at 78% | Life of loan | Conventional if you plan to stay long enough for PMI to drop off |
| DTI | Up to 50% with Fannie Mae automated approval | 29% housing and 41% total standard | Conventional if your DTI is above 41% but within conventional limits |
| Bankruptcy / foreclosure waiting | 4 years / 7 years | 3 years / 3 years | USDA if you have a recent credit event |
| Occupancy and units | Primary, second home, or investment; 1 to 4 units | Primary residence; single-family only | Conventional for multi-unit homes, second homes, or investment properties |
| 2026 loan limit | $832,750 baseline; higher in high-cost areas | No set limit; based on ability to repay | USDA if the price is above the conforming limit and your income supports it |
| Seller concessions | 3%, 6%, or 9% depending on down payment | Up to 6% | USDA if you need seller help above 3% with a small down payment |
For a related comparison, see FHA vs conventional loans for first-time homebuyers.
A Different Look at Conventional Financing
A first-time buyer came to Austin Capital Mortgage with a 720 credit score, about $12,000 saved, household income under her county’s USDA limit, and a home in a USDA eligible area outside Austin. A coworker had told her that with good credit, conventional was always the smarter choice.
Her loan officer priced USDA at 0% down and conventional at 3% down. At a 720 score with 3% down, the conventional PMI quote was noticeably higher than USDA’s 0.35% annual fee, and the conventional loan would have used most of her savings.
PMI would drop off eventually, but not for many years at her expected payment schedule. She chose USDA, kept her savings for reserves and moving costs, and planned to review a refinance once she built equity.
A first-time buyer with a 720 credit score who qualifies for USDA may still find USDA costs less than a 3% down conventional loan, especially when conventional PMI is priced high at a small down payment.
Case study attributed to Charlie Cooper, President, Austin Capital Mortgage. Borrower details are fictionalized.
Your Next Steps
- Check the property address on the USDA eligibility map
- Add up income for every adult who will live in the home and compare it with your county’s USDA limit
- Pull your credit scores and note the middle score
- Decide how much savings you want to put down versus keep in reserve
- Estimate how long you expect to keep the home and the loan
- Ask a loan officer to price USDA and conventional side by side
Ready to move forward? A loan officer can review your full scenario and show you both options in one conversation.
Not Sure Which Loan Fits Your File?
Austin Capital Mortgage can price your file across USDA and conventional programs through access to 100+ lenders, with a dedicated loan officer from start to finish. Pre-approval can be completed in as little as 24 hours with no credit impact.
Austin Capital Mortgage works with 100+ lenders, a hybrid banker and broker model, which means more program access and more flexibility to find the path that fits the borrower’s actual file.
Approval is subject to underwriting review and program eligibility. Rates and payments vary. Austin Capital Mortgage is a DBA of Aspire Home Loans, LLC, NMLS #1955132. Equal Housing Lender.
