What is the difference between FHA, VA and USDA loans?

Key takeaways

• Mortgages from the Department of Veterans Affairs, Federal Housing Administration and United States Department of Agriculture have different benefits, eligibility rules and down payment options for buyers.
• USDA loans have strict income and location requirements, while VA and FHA loans are more flexible. But check your debt-to-income ratio.
• All three programs help buyers qualify with lower down payments and flexible credit standards compared to conventional loans.

Buying a home can be financially out of reach for many people. To make things easier, government-backed home loan programs help buyers qualify for a mortgage with lower down payments and flexible credit standards. The government does not act like a lender — it doesn't give consumers loans. Instead, it backs loans made by private lenders, reducing the risk of a loan. The benefit: Homebuyers can now qualify for mortgages with lower down payments, flexible credit standards and competitive rates.

There are three major programs. They have different benefits and eligibility rules and work best with certain kinds of homebuyers:

VA loans are available to eligible veterans, active-duty service members, National Guard and Reserve members and some surviving spouses. The VA does not set a minimum credit score, but lenders might, according to the National Association of Realtors.

The loans don't need a down payment and do not require private mortgage insurance, according to NAR. A VA funding fee applies, but it can be rolled into the loan, according to the VA. The VA waives the fee for disabled veterans, the VA said.

The main benefit of VA loans is their favorable terms. There are downsides, though. Drawbacks include the funding fee and the restriction to primary residences only.

Unlike VA loans, FHA loans are open to most buyers. The minimum credit score is 580 for a 3.5% down payment, or 500 to 579 for a 10% down payment, according to American Express.

FHA loans come with upfront and annual mortgage premium insurance payments. The upfront charge is 1.75% of the loan amount, according to Rocket Mortgage. Annual premiums range from 0.15% to 0.75%, depending on loan size, loan term and down payment, Rocket Mortgage said. Mortgage insurance premiums fund a policy that protects lenders in case of default. It's typically required by conventional lenders.

Applicants who put 10% or more down can waive the annual premium after 11 years. Applicants who put less down must carry the premium for the life of the loan. It's typically required for homeowners who make less than a 20% down payment on their home. Homeowners who lack the capital to make a 20% down payment are perceived as credit risks.

FHA's biggest plus is enabling buyers with lower credit and low cash reserves to get mortgages. But drawbacks include the added cost of the Mortgage Insurance Premium, or MIP, which protects the lender if the borrower defaults on the loan, and the requirement that the property meets FHA safety and livability standards.

USDA loans are for buyers purchasing homes in eligible rural and suburban areas, according to the USDA. Income limits apply and are based on the area median income, typically 115% of area median income, it said.

The USDA does not set a minimum credit score, but most lenders require 640 or higher. The property must be in a USDA-eligible location, which you can verify using the USDA eligibility map.

USDA loans require no down payment, according to the USDA. Instead of mortgage insurance, the applicant pays USDA fees, both upfront and annually. USDA loans offer rural homebuyers an affordable solution to getting a mortgage. Downsides include geographic restrictions and income limits.

A few of the most common questions buyers ask about home loan programs:

FHA loans are the most flexible with credit scores, often allowing scores as low as 580. VA and USDA loans also have minimums set by lenders. Check with your lender for details.

Closing timelines for government-backed loans are similar to conventional loans.

No, government-backed loans are available to repeat buyers as well. FHA loans are popular with first-time buyers because of their flexible requirements, but they are not limited to them.

Some people think USDA loans are only for farms or that VA loans require perfect credit. In reality, USDA loans are for homes in eligible rural and suburban areas, and VA loans have flexible credit standards.