USDA? FHA? XYZ? Sometimes making sense of mortgage and loan jargon seems impossible. The bottom line question for many wanna-be homeowners becomes, which option is best?
To unravel this mystery, your situation and location come into play. The features and qualification requirements of USDA and FHA loans help determine which works best for you.
To clarify, the Federal Housing Administration (FHA) and the United States Department of Agriculture (USDA) offer home loan programs. The goal of each organization is to get consumers into homes. And, the criteria set by each works to make this possible.
So, what are the differences?
Only homeowners living in rural areas qualify for USDA loans. The liberal definition of rural in this case, includes some suburban areas, whole states and even densely populated states as well. The USDA online map provides information on an address’s or area’s eligibility.
(Check it out. You may be surprised to find a large portion of American property falls within this definition.)
Rural dwellers are likely to get a great deal with the USDA. These loans cater to very low and low-income borrowers. In fact, the lower income limit proves fairly non-restrictive loans. However, the maximums (set at 115 percent of median area incomes) knock some homeowners out of the running.
No loan limits exist with USDA products. However, this type of loan dictates that purchased homes be conservative in size, design and cost.
Down Payment and Rates
Low rates and no down payment accompany guaranteed USDA loans to encourage rural homeownership. And, this means you must live in the house you purchase. Using the home as rental or investment property is not permitted. Also, houses too close to property you already own are ineligible as well.
No down payment means the possibility of financing 100 percent of the property value with this option. Even closing costs can be financed. In fact, additional funds may be requested to cover other costs as well.
The upfront mortgage insurance is also financed into your loan. A percentage of the value is calculated and paid as a monthly fee. Buyers find the upfront percentage as well as the monthly premium low and enticing with USDA loans.
Excess funds? With USDA loans, the borrowed amount can be more than the property value. And, the total amount finances over a 30 to 38-year term. Homeowners use this money to pay property taxes and insurance or make home repairs under this type of loan.
One downfall? These properties tend to be outside employment centers. Unfortunately, finding a job or getting to work proves more difficult from these properties. This fact lacks appeal for some homeowners, obviously.
The goal of the FHA is also to get homeowners into houses of their own. In fact, no geography limits or home restrictions exist with FHA loans. But, again, you must reside in the home you buy. No rental or investment housing options exist with FHA either.
This type of loan proves forgiving of poor credit. Higher debt to income ratios are accepted and stretch in certain circumstances. Plus, homeowners can borrow up to 96.5 percent of the home’s value.
Down Payment and Rates
A 3.5 percent down payment is required along with closing costs for FHA loans. While rates tend to run low, a zero out-of-pocket option does not exist with FHA (unless someone gifts you a down payment or closing costs).
The upfront insurance expectation of FHA loans finance into the loan with interest. However, the monthly insurance payment is separate and must be considered in the overall cost. FHA homeowner-paid mortgage insurance premiums prove higher than their USDA counterparts. In figures, the payment doubles.
FHA loans leave no room for loan amounts to exceed purchase price. Therefore, down payments and closing costs must be paid another way. Again, gifts are permitted in order to remove the burden from the homeowner.
In general, USDA loans offer significant savings over FHA options. Other than the income cap and geographical restrictions, FHA offers little advantage over USDA loans.
Both USDA and FHA loans offer homeownership to consumers with low incomes or poor credit. However, significant differences exist. In sum:
- USDA loans apply only to rural properties. FHA loans hold no restrictions in this regard.
- Income maximums exist for USDA but not FHA loans.
- No down payment is required for USDA loans but is for FHA.
- USDA loans allow financing up to 100 percent of property value; FHA up to 96.5 percent.
- Financing of excess funds is permitted with USDA but not FHA.
- USDA loans carry no loan limits while FHA do.
- USDA loans carry lower mortgage insurance percentages than FHA products.
Weighing these various differences helps determine which option is best for your situation.