If you’re buying a home, there are few mortgage programs better than FHA and USDA loans.
But how do you know which loan is the best for you?
In this article, we will take an in-depth look into the differences between FHA and USDA home loans, the requirements, and how to know which one is best for you.
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The U.S. Department of Agriculture created the USDA housing program to help farmers and low-income families in rural parts of the country become homeowners. Borrowers must have a 620 credit score, buy a home in a USDA-eligible location, with income that doesn’t exceed 115% of the area median income (AMI).
USDA Loan Requirements
- 620 minimum credit score
- Income must be less than 115% of area median income (AMI)
- 50% maximum debt-to-income ratio
- Available for primary residences only
- Must be in a USDA-eligible rural area
- 1.0% upfront mortgage insurance premium
- 0.35% annual MIP
FHA loans are guaranteed by the Federal Housing Administration and offered by private mortgage lenders. Borrowers with a 580 credit score or higher are eligible with just 3.5% down. With a 500-579 credit score you need a 10% down payment. An mortgage insurance premium (MIP) of 1.75% is required.
FHA Loan Requirements
- 580 credit score – 3.5% down
- 500-579 score – 10% down
- 43%-50% maximum debt-to-income ratio
- For primary residence only
- 1.75% upfront MIP
- Annual MIP of 0.50%-1.05% is required
- 24 month waiting period after a foreclosure or bankruptcy
How to Know if a USDA or FHA loan is Better for You?
- FHA Loans – Buyers with just a 580 credit score may qualify for an FHA loan wi just a 3.5% down payment.
- USDA Loans – Buyers in rural areas of the country may qualify for 100% financing.
Which type of mortgage loan is best for you will depend on your situation. FHA loans are a good option if you have credit issues because of their low credit score requirements. But the FHA mortgage insurance rate is .5% higher than USDA.
USDA loans are popular because of their low mortgage insurance premium, and they do not require a down payment. But they are only available to low-income borrowers in rural areas and are harder to qualify for.
When you should get a USDA loan
If your home is in a USDA location, have at least a 640 credit score, and your household income does not exceed the USDA income limit, then you should get a USDA loan.
When you should get an FHA loan
If you’re in an eligible USDA location but either your income surpasses the income limit or have a credit score below 640, then an FHA loan is going to be best for you.
One of the greatest benefits of USDA loans is that they do not require a down payment. You’re able to finance 100% of the purchase price of the home.
USDA loans like all mortgages will have closing costs and other fees associated with it. You can expect to pay between 2%-5% of the purchase price in closing costs.
USDA does allow for the seller to pay up to 6% of these costs. If you cannot afford to pay upfront for the costs, you should consult your real estate agent about asking the seller to contribute to your closing costs.
Mortgage insurance is required with USDA mortgages, but they have the lowest rates. FHA home loans have a mortgage insurance premium of 0.85% of the loan amount. USDA loans have a much lower MIP rate of 0.35%.
Mortgage Insurance Premiums
An FHA loan will require a mortgage insurance premium regardless of your down payment. The FHA MIP rate will depend on the amount you put down and the amount of the loan.
Upfront FHA MIP
FHA also has an upfront MIP fee of 1.75% of the loan amount that is included in the closing costs. This fee must be paid by the borrower at closing and cannot be rolled into the mortgage loan.
If you meet all of the requirements for a USDA loan, it is a better option than FHA because they do not require a down payment and have a lower mortgage insurance rate. However, they are more challenging to qualify for than FHA loans.
You’ll need to have at least a 640 credit score, and your household income cannot exceed 115% of the medical income in your area. If you do not meet all of the USDA requirements, FHA loans are a great option. You really can’t go wrong.