The government offers a few different loan options to help you make home ownership a possibility. Among the most popular options are the USDA and FHA loans. How do you know which loan is better?
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It really depends on your situation. Each loan program has certain requirements not only for qualifying but for loan eligibility as well. Keep reading to learn which loan option is right for you.
The USDA Loan
In order to be eligible for the USDA loan, your total household income cannot exceed 115% of the average income for the area. Did you notice that we said total household income? This means more than just the borrower and co-borrower. It means anyone that lives in your home. This could mean grandma and grandpa or a friend you took into your home. If you have any adult making an income living in your home, you must disclose their income to the USDA.
If your total household income is less than 115% of the area, the USDA loan could be a good option, but there’s one more catch – you must buy a rural home. Before you go thinking you have to buy a home in the middle of cornfields, we have good news for you. The USDA considers rural homes those outside of the city limits and in areas with low population. This could mean just outside of your favorite city limits, not in the middle of cornfields.
If you meet both of the above requirements, you can secure 100% financing for your home. That’s the largest benefit between each loan program. The FHA program does require a down payment, so if we look just at this factor, the USDA loan wins.
The FHA Loan
The FHA loan doesn’t have any income restrictions or property location requirements. You can buy a home in any area as long as the home meets the FHA’s minimum property requirements. You also can make as much money as you want; the FHA doesn’t care about your total household income. They only look at the income made by you and any co-borrowers on the loan.
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The main difference with the FHA loan is that you must put down 3.5% on the home. You cannot secure 100% financing, which is why the USDA loan may win in this situation. But if you plan to buy a home that isn’t in a rural area, you don’t have the option to secure USDA financing.
The Differences Between the Programs
Aside from the down payment requirements, the USDA and FHA loan programs have a few other differences:
- USDA loans require a minimum 640 credit score and FHA loans require a 580 credit score
- USDA loans charge a 1% upfront mortgage insurance fee and FHA loans charge a 1.75% upfront mortgage insurance fee
- USDA loans charge 0.35% for monthly mortgage insurance and FHA loans charge 0.85% for monthly mortgage insurance
The Similarities Between the Programs
Both USDA and FHA loans require owner occupancy. In other words, neither program is for investment homes or second homes. You must certify that you will live in the property immediately following closing in order to use either program.
Both programs are backed by the government. In other words, the FHA and USDA guarantee lenders that they will pay them back should their borrowers default on the loan. This is what makes it easier for lenders to provide funds for homes even when you have risky qualifications, such as 100% financing and a low credit score.
So which loan option is better for you? It depends on your situation. If you plan to buy a home in a rural area and your total household income is average, USDA loans are the better option. You don’t need a down payment and you will pay less in mortgage insurance over the life of the loan. If you are buying a home outside of the rural boundaries or your total household income is higher than the average for the area, you will need to use the FHA program or even a conventional loan.
Talk to your lender and get quotes for all available loan programs to determine which option is the best for you. This way you can secure the financing that is the most affordable now and over the course of your home ownership.
