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USDA Rural Development Loans, Part 9: USDA Loans vs. FHA Loans
Buying your very first home or condo is a very exciting experience. Homeownership is the foundation of the American Dream and the first step toward financial independence. You’ll have a home you can truly call your own. Then, you also gain from all the financial benefits such as property appreciation (home equity) and excellent tax breaks.
One of the mortgage loan programs that all first-time homebuyers should research is the USDA Rural Development Loans. In this ongoing blog series, we’ve been exploring everything you need to know about this loan program offered by the United States Department of Agriculture. These loans offer up to 100% financing (no down payment required), low-interest rates and lower mortgage insurance (PMI) costs. Here are helpful links to the other articles in this series so far:
The other loan program you should know about is the FHA home loan, offered by the Federal Housing Administration. Both USDA and FHA loans are great for first-time homebuyers. Today, we want to walk you through the differences, as well as the advantages and disadvantages of each loan type. USDA Rural Development Loans are also discussed.
The biggest difference between FHA and USDA loans is certain borrower eligibility requirements. USDA loans are designated for “rural” areas as defined by the USDA and the most recent census data. They must be in cities with lower populations and less access to mortgage credit. The buyer must also have a low-to-moderate income (relative to the median income of the area) to qualify. Read Part 2 for more information about this. An FHA loan has no income limits or location restrictions.
Most USDA Rural Development Loans will require a credit score of 640 or higher, while FHA borrowers can have credit scores as low as 580 as long as other financial indicators are in reasonably good shape.
USDA loans offer 100% financing. This means no down payment is required. There may still be some upfront closing costs (see Part 7), but the borrower doesn’t have to put any money down toward the principal value of the mortgage loan. FHA loans typically require a 3.5% down payment to qualify. VA loans also offer 100% financing but are only available to military veterans, active service members, and surviving spouses. If you fall into one of these categories, you will definitely want to consider a VA home loan.
Mortgage Insurance (PMI)
Any mortgage loan where you put less than 20% down will require you to pay private mortgage insurance (PMI) until you have reached at least the 20% total principal payment threshold. These are non-refundable payments tacked onto your monthly mortgage bills. FHA loans typically require an upfront mortgage insurance fee of 1.75% of the loan amount, and then annual premiums of 0.85% (split into 12 monthly payments). USDA Rural Development Loans offer the lowest PMI rates of any mortgage loan. It is generally a 1% upfront fee and 0.35% annual rate (split into 12 monthly payments.
USDA loans do not have any maximum loan limits. FDA loans will have a maximum loan amount of $356,362 in most areas. This amount is updated every year and will vary from state to state and county to county based on median home prices in the region.
USDA loans are only available for 30-year fixed-rate mortgages. FHA loans offer more flexibility to be used for 30-year fixed-rate mortgages, 15-year fixed-rate mortgages, and adjustable-rate mortgages (ARMs).
USDA Rural Development Loans can only be used for single-family primary residences in rural areas. They cannot be applied toward the purchase of an investment property or second home. Meanwhile, FDA loans must also be used for primary residences, but you can purchase multi-family properties with up to four units as long as you occupy at least one of the units.
These are the primary differences between USDA home loans and FHA home loans. If you think you are eligible for one or both of these programs (and/or a VA loan, as well), it’s a good idea to talk with your mortgage lender. Explore your home loan options and choose the program that is best for your financial situation.
To discuss your mortgage loan options for Atlanta first-time home buyers, contact Moreira Team | MortgageRight today. We’ll help you get the home loan that’s right for you and your family.