
Homebuyers in Indiana have numerous mortgage options available today, it’s crucial to understand the differences between them to make an informed decision. In this guide, we’ll compare two popular mortgage options for Indiana first-time homebuyers—USDA Rural Housing loans and FHA mortgages. We’ll cover the benefits and eligibility requirements of each, helping you decide which one best suits your needs.
What are USDA Rural Housing Loans?
The United States Department of Agriculture (USDA) offers a special loan program aimed at promoting homeownership in rural areas throughout Indiana. USDA Rural Development (RD) loans provide an excellent opportunity for eligible homebuyers to purchase a home with zero down payment. In fact, USDA along with VA home loans are the last remaining programs that offer 100% financing without down payment assistance.
Benefits of Indiana USDA Loans:
- No Down Payment: One of the most significant advantages of USDA loans is the zero down payment requirement. This means you can finance 100% of the home’s purchase price, making it easier to get into a new home without saving for years.
- Low Interest Rates:USDA loans often come with lower interest rates compared to conventional loans. The government backing allows lenders to offer more competitive rates, translating to lower monthly mortgage payments.
- Flexible Credit Requirements: USDA loans have more lenient credit requirements, making them accessible to a broader range of homebuyers. Even if your credit score is less than perfect, you may still qualify for a USDA loan.
- Low Private Mortgage Insurance (PMI): USDA loans have lower monthly mortgage insurance when compared to conventional and FHA loans.
Eligibility Requirements for USDA Loans:
- Location: USDA loans are only available for properties in eligible rural areas. However, “rural” is broadly defined, and many areas that may not seem rural on the surface, may qualify for USDA loans. The main cities like Indianapolis, Fort Wayne, South Bend likely will not be eligible for USDA. However, some of the surrounding suburban locations may be. You can check the USDA’s property eligibility map to see if a specific area qualifies. *Please see the property eligibility map below for a snapshot of the approved locations, all the darker shaded areas represent ineligible areas.
- Income Limits: USDA loans have income limits based on the area’s median income and the size of your household. Generally, your income should not exceed 115% of the median income for the area. For Indiana, the household income limit in 2025 is currently $112,450 for a household of 1–4 members. The limit increases to $148,450 for larger families with 5 or more members.
- Credit Score: While there’s no minimum credit score set by the USDA, most lenders require a score of at least 640 to qualify for automatic GUS approval. Lower scores down to 600 may still be considered, but additional documentation and manual underwriting will be needed.
- Debt-to-Income Ratio: Your debt-to-income ratio (DTI) should generally not exceed 41%. However, exceptions can be made for borrowers with strong credit scores or other compensating factors.
What are FHA Mortgages?
The Federal Housing Administration (FHA) offers another popular mortgage option for first-time homebuyers. FHA loans are designed to help low-to-moderate-income buyers achieve homeownership with more accessible qualification standards.
Benefits of FHA Mortgages:
- Low Down Payment: FHA loans require a down payment as low as 3.5% of the purchase price. This makes it easier for first-time buyers with limited savings to purchase a home.
- New 100% FHA Financing: Eligible first-time buyers could have 100% financing options with approved down payment assistance.
- Low Interest Rates: Similar to USDA loans, the FHA program offers some of the lowest interest rates available in the marketplace today.
- Flexible Credit Requirements: FHA loans have more forgiving credit requirements compared to USDA loans, making them accessible to buyers with lower credit scores. A minimum credit score of 580 is required for the 3.5% down payment option, while scores between 550 and 579 can possibly be approved, but often require a 5%-10% down payment.
- More Lenient Debt-to-Income Ratio: FHA loans typically allow for higher debt-to-income ratios compared to USDA loans, making it easier for buyers with more debt to qualify.
Eligibility Requirements for FHA Mortgages:
- Credit Score: To qualify for an FHA loan with a 3.5% down payment, you’ll need a minimum credit score of 580. If your score is between 500 and 579, you’ll need a 10% down payment. Scores below 500 are generally not eligible for FHA financing.
- Down Payment: A down payment of at least 3.5% of the purchase price is required for FHA loans. This can come from your own funds, a gift from a family member, or a grant from a down payment assistance program.
- Debt-to-Income Ratio: FHA loans generally allow for a debt-to-income ratio of up to 48%. However, borrowers with higher DTIs may still qualify with compensating factors like a large down payment or cash reserves.
- Mortgage Insurance: FHA loans require both an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP). The UFMIP is usually 1.75% of the loan amount, while the annual MIP ranges from 0.45% to 1.05%, depending on the loan term and loan-to-value ratio.
USDA Rural Housing Loans vs. FHA Mortgages?
So what program is better? Both USDA loans and FHA mortgages offer unique advantages for Indiana first-time homebuyers, but the best choice depends on your specific circumstances.
Choose a USDA Loan if:
- You’re looking to buy a home in a rural eligible area.
- You don’t have a down payment saved up.
- Your household income falls within the specified limits.
- You have a credit score of at least 620 or are willing to undergo manual underwriting.
Choose an FHA Loan if:
- You’re planning to buy a home in a populated urban area like Indianapolis, South Bend or Fort Wayne.
- Your household income exceeds the USDA limits.
- Your credit score is 580 or higher, or you’re willing to make a higher down payment with a score between 550 and 579.
- You prefer the flexibility of higher debt-to-income ratios.
- You can afford a down payment of at least 3.5%. *Note, select income eligible first-time buyers may have down payment assistance options available to assist with the FHA 3.5% down payment and closing costs. Please contact us today to learn more.
Deciding between a USDA Rural Housing Loan and an FHA Mortgage ultimately comes down to your unique financial situation, the location of the property you wish to buy, and your long-term goals. Both options offer secure government backing and provide good benefits for Indiana first-time homebuyers.
Ready to take the next step in your home buying journey? Contact us today to learn more about USDA and FHA loans, and find out which one is right for you. Our team of experts is available 7 days a week to guide you every step, just call or submit the Quick Request Form to get started.