Zero Down USDA versus VA Loan

If you qualify for a ‘zero down’ mortgage, you’ve got a huge advantage in terms of being able to afford your first home. But even when you are fortunate to have access to a mortgage that requires no down payment, you still have some important choices to make.

Here’s how to weigh the pros and cons of a zero down USDA loan versus a VA loan.

Turning zero down into big benefits

First, let’s talk about the advantages that a zero down mortgage offers.

Buying a home, especially for the first time, can be daunting, and saving what’s needed for a down payment can make homeownership feel out of reach. While there are ways to do it—save your tax refunds, automate your savings, and more—being able to buy a home with no down payment can make homeownership a reality much sooner.

Even if you have money saved for a down payment, a zero down mortgage still provides valuable benefits. You can instead use that cash to:

• Cover the upfront expenses of buying and owning a home—moving, insurance, repairs and remodeling, and more.
• Make extra payments each month to pay down your principal, which will help you build equity and pay off the loan faster.
• Consider a loan with a 15- or 20-year term, which has lower interest than a 30-year loan. You can use the money you would have paid towards the down payment towards the higher monthly payment that comes with a shorter-term loan, but still save overall.
• Reduce the size of your loan. Even with a loan that has no required down payment, you can still put your own money toward the purchase to reduce the amount you need to borrow.; this also helps you build equity.
• Fund an emergency savings account. Homeownership can be full of surprises, so it’s always a good idea to be financially prepared for the unexpected.

Understanding VA and USDA loans

Two of the most common zero down mortgages are VA loans, which are backed by the Department of Veterans Affairs, and USDA loans, backed by the U.S. Department of Agriculture.

• VA loans
  Designed to reward military members for their service, VA loans are available to qualified military service members, veterans, and some spouses. Besides a zero down payment, a VA loan has several important features:
  • No requirement for private mortgage insurance (PMI)
  • Competitive interest rates
  • No maximum or minimum income restrictions
  • One-time funding fee, which can be rolled into the loan
  • Limits on closing costs
  • Relatively flexible credit and debt-to-income (DTI) requirements
  • Available to purchase single-family homes, condos (in VA-approved projects), townhouses, manufactured homes (with some restrictions), and multi-unit properties (up to 4 units if you occupy one of the units); a VA loan can also be used to fund new home construction • No prepayment penalties
  • Not limited to first-time homebuyers, and no limits on the number of times you can get a VA loan
  • If you’re an active-duty service member, you can use your Basic Allowance for Housing (BAH) to pay for your mortgage
    
    
• VA loans do have some qualifiers
  • Can only be used to purchase your primary residence; it cannot be used to fund the purchase of a second home or rental property
  • May have a stricter home appraisal process than a conventional mortgage
  • VA has no minimum credit score requirement, but your lender may; typically, that number is 620 or higher

Your eligibility is determined by your length of military service, duty status, and terms of discharge. To qualify, you’ll need a Certificate of Eligibility (COE) that validates your military service. To apply, take your COE to a VA-approved lender like Global Credit Union, who will help you through the process.

• USDA loans
  A USDA mortgage is designed to support rural communities by making it more affordable for you to buy a home in the area. Sometimes called Rural Development loans, these mortgages have some unique terms:
  • Only available in certain rural and some suburban areas
  • Designed for people with low to moderate income, which cannot exceed 115% of the area’s median income
  • No military service required
  • Competitive interest rates; often lower than conventional loans
  • Requires PMI, usually charged as an annual fee, but rates are usually lower than with traditional home loans
  • Can be used to purchase single-family homes, condos, townhouses, manufactured or modular homes (with some restrictions), and foreclosed homes
  • You’re allowed to include your closing costs in the loan amount
    
    
• USDA loans do have some restrictions
  • Must be your primary residence
  • Property cannot produce income; you can’t finance a multi-unit property, even if you live in one of the units, and you cannot use a USDA loan to purchase a rental property or farm
  • No minimum credit score requirements, but lenders often look for a score of 640 or better
  • Comes with an annual fee, which can only be removed by refinancing into a conventional loan

To apply, contact one of the approved lenders in USDA’s network. Processing time will vary depending on funding availability and demand in your area.

Quick comparison: Zero down USDA loan vs VA loan

Which loan is best for you?

Both the VA and the USDA loans are excellent financing options, and if you qualify, they both warrant serious consideration because of their primary benefit—no down payment requirements. Both loans offer flexibility and may be available as either fixed-rate or adjustable rate, in terms that range from 15 to 30 years.

Pros and cons of VA and USDA loans

VA loans are more common. In fact, lenders originated more than 10 times more VA loans in 2023 than USDA loans. But that doesn’t mean USDA loans don’t offer value; they’re just a bit more restricted in terms of who qualifies, based on income and location, but they’re a great option if you don’t have military service.

If you qualify for both, most experts recommend that you consider the VA loan first, because it is more flexible in terms of your property location, it has no income restrictions, there is no PMI requirement, and is often more cost-effective in the long run. If you don’t qualify for a VA loan, the USDA loan is a great option if your property is in an eligible rural or suburban location and your income is below the limit.

Keep in mind that a zero-down loan means you’ll have less equity in your home, and you’ll pay more interest over the life of the loan because you’re borrowing more money. But if a zero down mortgage puts you closer to your dream of owning a home, both the VA and USDA loans are great funding options.