When one thinks of the U.S. Department of Agriculture (USDA), what might first come to mind are nutritional guidelines, beef ratings, and egg grades. But the USDA does much more than evaluate the food at your local grocery store – it can help place a roof over your head in the form of a home mortgage.
Like the Federal Housing Administration (FHA), the USDA has home-loan programs that are available to thousands of potential borrowers. And like FHA-insured loans, USDA loans include seller-paid closing costs, 30-year fixed-rate terms, FICO score requirement as low as 580, and loans for first-time or repeat buyers.
FHA and USDA loans differ regarding where the loans can be utilized. A USDA loan is intended mainly for borrowers who wish to buy in defined rural or farmable areas, while an FHA loan does not exclude specific geographic areas.
Both are great ways to finance your new home, whether it’s a house in the suburbs or a small chicken farm with wide-open spaces. To decide between the two, here are some ways they differ:
A down payment is often one of the biggest hurdles for first-time homebuyers. Fortunately, down-payment requirements of both FHA and USDA home loans are reasonable. An FHA loan has a minimum down payment requirement of 3.5 percent, plus closing costs. FHA loans require mortgage insurance. USDA does not have actual mortgage insurance but is much like FHA with regards to an upfront fee and monthly fee. USDA will always have an upfront guarantee fee as well as an annual fee (that is a monthly fee charged to borrower). These are charged regardless of down payment and the amounts are set by congress and are subject to change. Also, New American Funding allows for a 0-credit score when a borrower has no credit but can provide up to non-traditional credit references with acceptable repayment histories.
As mentioned earlier, eligibility for a USDA loan depends on the home being located in an area designated USDA eligible, so likely in a rural or semi-rural area. On the other hand, FHA-insured home loans have no geographic restrictions when it comes to where the house is located. There are, however, loan limits based on the county where the home is located. Additionally, it’s not easy to get condos with FHA financing as the entire complex requires a certain number of owner-occupied units and many condo complexes have a very high percentage of investor owners.
USDA publishes online Property Eligibility maps with which buyers can check the eligibility of a certain address or geographical area. Some entire states are USDA-eligible, and some highly populated states contain surprisingly high USDA-eligible areas.
FHA loan limits vary from one location to the next and are set at the county level. If a borrower wishes to purchase a larger home – and has an income that does not exceed the maximum amount set by the USDA – then a USDA loan might be the right choice. While there are no set loan limits for USDA, a borrower is only limited by having too much income and how much home they can afford up to their qualifying debt-to-income (DTI) ratio.
USDA has a FICO score requirement as low was 580 and FHA loans have a FICO score of 500.
In the case of FHA loans, there is no income limit. USDA loans are designed for borrowers who are in low to middle-income brackets and whose income doesn't exceed 115-percent of the area’s median income. The income limits for USDA are based on household income, size and location, not just the borrower(s). Income must be considered from all adult household occupants regardless if they are a borrower or a non- borrowing household occupant.
For a USDA loan, there are no loan minimum or maximum amount limits.
Making the choice between a USDA and FHA home loan is not a simple one. But based on where a borrower is hoping to buy, the type of loan may make all the difference. A USDA loan can help a borrower avoid a down payment, incur lower mortgage insurance premiums, and in total save thousands of dollars over the life of the loan term.
To learn more about USDA and FHA home loans ? and find the one that’s ideal for your circumstances – speak to a Loan Officer at New American Funding.