Conventional Loan vs USDA Loan

If you’re thinking about buying a home in Arkansas, you’ve probably realized pretty quickly that there are a lot of different mortgage options to consider. While conventional loans are among the most common, options like USDA loans can also offer valuable benefits, particularly for buyers in rural areas. Knowing how these two options compare can make it easier to decide which one fits your needs. 

At Arkansas Federal Credit Union, we offer both conventional and USDA loans to help you buy a home anywhere in Arkansas, whether it’s a small town or a bigger city. 

What Is a USDA Loan? 

A USDA loan is a type of mortgage insured or backed by the U.S. Department of Agriculture. You may also hear it referred to as a rural development loan. It’s designed to help people buy homes in small towns and rural areas. One of the biggest benefits is that it doesn’t require a down payment. 

While there’s no set minimum credit score, most lenders like to see a credit score of at least 640. That said, some lenders may be willing to work with lower scores if the rest of your finances look solid.  

To qualify, the home must be in a USDA-approved location, and your household income must be within the program’s limits, which vary based on how many people live in your home. If you’re buying in Arkansas, check out more about USDA loans here.  

What Is a Conventional Loan? 

A conventional loan is a type of mortgage that is not backed or insured by the government. Instead, it is offered by private lenders, such as banks or credit unions, and is usually a good option for borrowers with good credit and stable income. 

Conventional loans offer a lot of flexibility, with no maximum income or location restrictions. You can use one to purchase a primary home, a second home, or even an investment property.  

Conventional loans are widely available across Arkansas, from cities to suburbs and everywhere in between. 

USDA Loan vs Conventional Loan 

Let’s compare USDA and conventional loans side by side to see how they differ. 

Application and Timeline 

• USDA loans can take around 45 days to close, rather than the usual 30 days. The reason this loan type can take longer is because after your lender approves everything, the loan still needs final approval from the USDA. 

• Since there’s no government review involved in a conventional loan, the process tends to move a little faster. 

Of course, every situation is different. How quickly you are able to provide the necessary documents, how busy the appraisers are, and the availability of the title companies can all affect your timeline. 

Income Limits 

• Since USDA loans are designed to help low-to-moderate income buyers, there is a cap on how much you can earn and still qualify. That income cap is dependent upon how many people live in your household.  

• Conventional loans don’t have maximum income limits. That means they’re available to a wider range of borrowers. 

Credit Requirements 

• There’s no official minimum credit score for a USDA loan, but most lenders like to see a minimum score of 640. 

• For conventional loans, you’ll typically need a credit score of at least 620, though the exact number can vary depending on the lender. 

Down Payment 

• One of the biggest perks of a USDA loan is that you don’t need a down payment, which can be a huge help for first-time homebuyers.  

• Conventional loans usually require a down payment of at least 3 to 5 percent. And a down payment of 20 percent lets you avoid the extra cost of private mortgage insurance. 

Loan Limits 

• USDA loans are designed for modestly priced homes, so they usually come with lower loan limits. 

• Conventional loans, on the other hand, often allow for higher loan amounts, which can be a better fit if you’re looking to buy a more expensive home. 

Appraisals 

Both USDA and conventional loans require appraisals to confirm the value of the home and ensure it meets basic safety standards. 

Mortgage Insurance 

• With a USDA loan, you’ll need to pay a guarantee fee. It works a lot like mortgage insurance, but it usually costs less. 

• With a conventional loan, you’ll have to pay private mortgage insurance (PMI) if your down payment is less than 20 percent. 

USDA Loans: What to Like and What to Keep in Mind 

What to Like 

• No down payment required 
• Often lower interest rates 
• Lower mortgage insurance costs 

What to Keep in Mind 

• Income limits apply 
• The home must be in a USDA-eligible geographic area 
• Only available for primary residences 

Conventional Loans: What to Like and What to Keep in Mind 

What to Like 

• No maximum income or geographic location restrictions 
• Higher loan amounts available 
• Can be used for different property types 

What to Keep in Mind 

• Stricter credit and income requirements 
• Interest rates may be higher for lower credit scores 
• PMI is required if your down payment is less than 20 percent 

Which Loan Is Right for You? 

The best choice depends on your finances, where you want to live, and the kind of home you’re after. 

If you qualify based on income and location, a USDA loan can be a great option since it usually requires a lower down payment, and can help you avoid private mortgage insurance, saving you money both upfront and each month. However, if you need more flexibility or are buying outside a USDA-approved area, a conventional loan might be a better fit. 

Apply for a Home Loan Today 

Buying a home is a big step, and finding the right loan can make all the difference. Whether you’re considering a USDA loan or a conventional loan, Arkansas Federal Credit Union is here to assist you with buying a home in Arkansas. 

Ready to get started? Apply for a mortgage today or talk to one of our local loan experts to find the right fit for your goals.