USDA VS FHA Home Loans
There are many different types of home loans available for homebuyers who are looking for their dream home. The various options may be confusing, especially when many of them can have similar benefits or requirements. Two loans that have some noticeable similarities are USDA and FHA loans. FHA loans are one of the most popular home loans on the market, while USDA loans can offer beneficial opportunities to borrowers in certain areas.
What is a USDA Loan?
A USDA loan is a mortgage, also known as a Rural Development loan, that falls under the governance of the United States Department of Agriculture. It is guaranteed by the federal government, which lets lenders, like New American Funding, offer them with more flexible terms. USDA loans were created in 1991 to give low-and moderate- income borrowers more opportunities to become homeowners.
These loans are location-based and can be beneficial to borrowers who are concerned about having a high-enough income level to qualify for a traditional mortgage. The only available option for USDA loans is a Fixed-Rate loan and they can be used to purchase a new home, renovate an existing one, or construct a house from the ground up.
USDA loans can be issued by the USDA directly or by a participating lender. They have their own set of eligibility requirements including property, income, and location requirements. They also have unique benefits including no down payment requirement, more flexible credit scores, and 100% financing.
What is an FHA Loan?
An FHA loan is also a government-backed loan guaranteed by the Federal Housing Administration. Unlike the USDA, the FHA does not issue these loans itself. They do, however, provide insurance on the loan allowing more borrowers the opportunity to receive home financing through an approved lender. They were created in 1934 in order to make homeownership more affordable and are now one of the most popular loans on the market.
These can be particularly beneficial to first-time homebuyers since they have more flexible requirements than other loans like Conventional loans. They can be used to buy a home or to refinance an existing mortgage and have a variety of loan options including 30-Year Fixed-Rate, 15-Year Fixed-Rate mortgages, and Adjustable-Rate mortgages.
FHA loans have their own set of requirements including the ability pay a mortgage insurance premium (MIP), proof of income, and the ability to pay a 3.5%-10% down payment. They also have their own benefits such as allowing a high debt-to-income ratio and lower credit score requirements.
USDA vs FHA Loans: Eligibility Requirements
All home loans have their own eligibility requirements and government-backed loans like FHA and USDA loans have different requirements than others like Conventional loans.
The eligibility requirements for USDA loans include:
- Property must be your primary residence: USDA loans are not available to finance investment or rental properties, or second homes.
- Property must be located in an eligible area: USDA loans are limited to eligible geographic locations.
- Property must be appraised: The USDA has its own appraisal standards that must be met. This is to ensure that the loan amount is accurate to the value of the home.
- Minimum credit score of 580
- You must be a U.S. citizen, non-citizen, or a Qualified Alien
- Your income must be within eligible limitations: USDA loans were developed for low-to moderate-income households and borrowers must fall within those income limits to qualify.
The eligibility requirements for FHA loans are:
- Property must be your primary residence
- Minimum credit score of 500 with a higher down payment: It is important to note that your credit score does affect your interest rates, so the higher your credit score the better interest rates you are likely to get.
- The ability to pay 3.5%-10% down payment: How much you will need to put down will depend on your credit score. The lower your credit score, the higher of a down payment you will need to make.
- The ability to pay MIP: FHA loans require MIP. The exact amount will depend on the loan amount, but borrowers are required to pay an upfront payment and a monthly mortgage insurance payment.
- Property must be inspected and appraised: The FHA has strict standards that your property must meet. The inspection and appraisal will ensure that the property meets those standards.
- Proof of steady income and employment
- DTI of 57% or lower
In addition to these requirements, your lender will have their own set of unique qualifications for approval for each loan. A Loan Officer at New American Funding will be happy to answer your questions and help you find which loan is right for your individual needs.
Similarities Between USDA and FHA Loans
There are several similarities between USDA and FHA loans. The most notable include:
Government-backed: Both USDA and FHA loans are backed by the federal government. USDA loans are backed by the United States Department of Agriculture and FHA loans are backed by the Federal Housing Administration. This backing means that these government branches insure these loans against default by the borrower. This guarantee allows lenders to issue these loans to individuals who may not be able to qualify for other mortgages.
Available to homebuyers who may not qualify for other mortgages: USDA and FHA loans are both designed for homebuyers who might have concerns about qualifying for more traditional mortgages. USDA loans were created for low-to moderate-income borrowers and FHA loans were created for borrowers with less-than-perfect credit. Each loan allows for certain terms to be more flexible.
Fixed interest rates: Both USDA and FHA loans have fixed interest rate options. This means that whatever interest rate (the mortgage rate you pay on your loan) you start your loan under will stay the same over the life of the loan. Since interest rates change daily, this option offers borrowers stability with their monthly payments.
Use the New American Funding mortgage calculator to calculate your mortgage costs today.
The Differences Between FHA and USDA Loans
FHA and USDA loans have similarities, but they are different loans and fall under the governance of different federal agencies. This means that each agency has its own set of conditions as well as those applicable qualifications of your lender.
Some of the most notable differences between FHA and USDA loans are:
Down Payment Requirements: No down payment is required for USDA loans. FHA loans require a down payment amount of 3.5%-10%. It is important to note that your down payment amount can affect your interest rate. The more money you are able to put down for your down payment, the lower your interest rates may be.
Location Requirements: In order to qualify for a USDA loan, the property must be in an eligible location. The USDA has provided an interactive map of the eligible areas that you can use to search the address of the property you want.
FHA loans do not have any location requirements. However, loan limits vary by both state and county. So, whether or not you qualify for an FHA loan will not depend on the location of the property, but how much you’ll be able to qualify for will be affected by where the property is.
Credit Score: The minimum credit scores for both USDA and FHA loans is 580. However, lenders will often accept as low as 500 for FHA with other conditions.
Mortgage Insurance: USDA loans do not require any mortgage insurance. They do, however, require a guarantee fee. This fee acts similarly to mortgage insurance in that it helps the USDA guarantee the loan against default. This upfront fee is based on the total amount of the final loan. There is also an annual fee required for USDA loans.
FHA loans do require mortgage insurance in the form of MIP. The actual amount of MIP depends on the total amount of the final loan. But they also require an upfront payment of 1.75% as well as a monthly mortgage insurance payment for the life of the loan.
Closing Costs: Closing costs are a standard part of any home loan including both USDA and FHA loans. Closing costs often include origination fees, appraisal costs, service fees, taxes, and other miscellaneous costs. The main difference between these two loans is that FHA loans allow the options for the seller to pay for some of the closing costs. Closing costs are usually 2%-6% of the purchase price.
Income Requirements: FHA loans have no specific income requirements but do require proof of steady and consistent income. USDA loans, however, were created specifically for low-to moderate-income borrowers. The income requirement for USDA loans varies according to factors like the location of the property, but in general, the borrower’s income can’t be greater than 115% of the medium income of the area. You can check your income eligibility using the USDA website.
Home Requirements: FHA loans have no specific location requirement for eligibility. However, their loan limits are location dependent, and they do have strict FHA specific appraisal and inspection standards that must be met. USDA loans on the other hand, have strict location requirements and the home must also meet USDA specific appraisal and inspection standards.
USDA vs FHA Home Loan FAQs
What is Easier to Get an FHA or USDA Loan?
Which loan is easier to qualify for will depend on your individual financial circumstances as well as other factors like the location of the property you want to purchase.
Is a USDA Loan Cheaper Than an FHA Loan?
USDA loans can be cheaper than FHA loans. This is because they require no down payment. Their mortgage insurance premiums are also lower than those of FHA.
What do USDA and FHA Loans Have in Common?
The main commonality between USDA and FHA loans is that they are both backed by the federal government. This means that they are guaranteed by their respective government agencies against default. This allows lenders to offer them to borrowers with more flexible terms, however, their requirements are specific to each agency.
Both USDA and FHA loans are also designed to help borrowers with less-than-perfect credit and potential income concerns, making them more accessible to homebuyers who may not be able to qualify for more traditional mortgages.
Is USDA Stricter Than FHA?
Each loan has its own requirements and how strict those requirements are depends on the loan. For instance, the income and property requirements for USDA loans are stricter than FHA loans, however, the down payment requirement for FHA is stricter than USDA. Overall, USDA loans seem to have stricter requirements overall, but may still be easier to qualify for than an FHA loan depending on the borrower’s circumstances.