What are the Differences Between USDA and FHA Home Loans?
The USDA and the FHA home loans are typically the best choices out there for low to moderate income borrowers.
USDA vs FHA
Offering lower credit score requirements, a reasonable to zero down payment and less stringent income requirements than conventional loan programs make these programs a popular choice among US home buyers.
However, when you stack them one next to the other, the USDA loan seems to provide more benefits than the popular FHA home loan. Let’s start by looking at the down payment required by the programs.
USDA in comparison to the FHA
USDA is the only no money down home loan for nonmilitary personnel, so there is ZERO down payment required. The FHA loan does have a minimum required down payment of 3.5% of the purchase price.
When looking at credit and income requirements for FHA and USDA loans; most lenders will require a credit score of 620 for a USDA loan, whereas the FHA loan allows borrowers to have credit scores as low as 550.
Maximum Income Guidelines with USDA vs FHA Loans?
There are no income minimums for either loan type, but USDA loans do have maximum income guidelines, these vary by location but are set at 115 percent of the county’s median income. These limits can vary by location, family size and other factors.
Another big difference between FHA and USDA is the upfront and private mortgage insurance requirements. Both USDA and FHA loans require upfront and annual mortgage insurance premiums, however the USDA’s premiums are much more affordable.
USDA loans have an upfront mortgage insurance of 1 percent, while FHA loans have a 1.75 percent premium. Most Borrowers will finance these fees into their loan rather than pay them at closing.
The annual mortgage insurance charge is 0.35 percent of the loan balance, for USDA loans, while FHA borrowers pay 0.85 percent. On both loan programs, the annual fees are for the life of the loan, unless you put down 10% or more on the FHA loan.
Then the PMI falls off after 11 years of paying the mortgage on time.
USDA and FHA Home Requirements
Like all government-backed home loans, both FHA and USDA loans require borrowers to purchase homes that will be used as a primary residence.
However, since the purpose of a USDA loans is to rural development in, they are one of the only mortgage programs that require its borrowers to purchase property in a specified geographic zones.
The good news is that it is estimated that 97% of the country is considered eligible outside of urban areas. FHA loans have no limitations on property location, and borrowers can purchase their home anywhere they choose to, but must abide by the maximum county loan limit set by FHA.
As you can see, there’s definitely a difference in the cost– both up front and over time. The higher costs of FHA’s mortgage insurance premiums can add up over a 30-year mortgage.
For the majority of homebuyers looking to purchase a property, the USDA loan seems to be the more affordable choice.