Are you trying to decide between a USDA mortgage and an FHA home loan? If so, you probably have questions about the advantages and disadvantages of each. While you may be wondering how they compare to one another, you might also be wondering if they are two different things. Let’s answer some of these questions now.
Is a USDA Loan the Same as an FHA Loan?
First of all, sometimes we see people asking whether USDA loans and FHA loans are the same thing. The answer to that question is no, USDA loans are not the same as FHA loans.
Both are guaranteed by government agencies, but USDA loans are backed by the US Department of Agriculture, whereas FHA loans are backed by the Federal Housing Administration.
Is a USDA Loan Better Than an FHA Loan?
Another question we sometimes hear is whether a USDA loan is better than an FHA loan or vice versa. Neither type of mortgage is better than the other in general. Rather, one mortgage type or the other may be more suitable for your situation.
Eligibility for USDA Loans vs. FHA Loans
Along with different government agencies backing each program, another difference is in the eligibility requirements for each.
- The USDA loan program is income-based. Your income cannot exceed 115% of the median income for your region. There are no income rules for FHA mortgages, however. No matter how much or little you earn, you are welcome to apply for an FHA loan.
- The minimum credit score for a USDA loan is 640 (for automatic underwriting—manual underwriting may still be possible with a lower score). For an FHA mortgage, the minimum score to qualify for a 3.5% down payment is 580. You can still qualify if your score is as low as 500, but the down payment is 10%.
There are also requirements with respect to your debt-to-income (DTI) ratio, as well as the nature of the property itself.
Also, the USDA loan program is specifically for purchasing homes in “rural” locations as deemed by the USDA. With an FHA loan, you can purchase a property in any type of area, whether it is rural, suburban, or urban.
Benefits of USDA Loans vs. FHA Loans
- Your down payment with an FHA mortgage will be 3.5% at a minimum. But if you are found eligible for a USDA loan, you may be able to buy a home with zero down.
- Both USDA and FHA loans feature affordable interest rates.
Other Differences Between USDA Loans and FHA Loans
- Usually it is faster to get an FHA loan than a USDA loan. The reason for that is because the USDA and lender both need to do underwriting for a USDA mortgage, so that adds to the processing time.
- There is no set maximum loan limit for a USDA mortgage, but there is for an FHA loan. That does not mean you can borrow an unlimited amount of money with a USDA loan, it just means that your particular qualifications will determine the cap, rather than the cap being fixed and identical for every borrower.
- You need an appraisal for either type of loan, but what the appraiser is looking for differs between the two products.
- You need to pay mortgage insurance premiums (MIP) with an FHA loan. With a USDA loan, you have to pay a funding fee and annual insurance. Nevertheless, the monthly insurance premiums for USDA mortgages are significantly lower than those for FHA loans. The funding fees are also much lower.
Consider a USDA Loan If:
- You are buying a home in a rural area (be sure to check with us about what “rural” means—some areas you might not realize are “rural” by USDA definitions actually are).
- You believe you fit within the income brackets.
- You think you can meet the credit score and DTI ratio requirements.
- You are hoping to buy a home with no down payment.
- You want to save on insurance costs.
Consider an FHA Loan If:
- You do not meet the credit score requirements for a USDA loan.
- Your income level is too high to qualify you for a USDA mortgage.
- You believe you can make the 3.5% or 10% down payment.
- You need to get a mortgage more rapidly than would be possible if you were applying for a USDA home loan.
- The home you want to buy is outside a “rural” area as denoted by the USDA.
We Can Help You Choose the Type of Mortgage That is Right For You
Now you know the key differences between USDA and FHA loans. Both of these government-insured loan programs offer affordable rates and easy credit qualifications, but there are many differences between them with respect to benefits, features, and costs.
Not sure what type of loan is right for you? We can help you decide based on your eligibility and your goals. To get started now, please call us today at (540) 838-5868 to schedule your consultation.