Mortgage Comparison – FHA Versus USDA

For many Americans, achieving the American Dream of home ownership can seem like a series of never-ending hoops they must jump through. From securing a down payment to validating favorable credit scores and proof of income, it can quickly become a complicated process. Oftentimes, would-be buyers become so discouraged and frustrated that they fail to pursue the very information that could really turn their situations around. It is unfortunate but true, that thousands of hopeful home buyers are unaware of special loan programs that were designed especially for them!

The federal government has several programs in place designed to assist eligible buyers. Two of the most popular are FHA loans and USDA Rural Housing loans. Let’s first take a look at the Federal Housing Administration’s loan program.

FHA Loans
More than eighty years ago, in 1934, the Federal Housing Administration (FHA) created an assistance program for those Americans who could not afford a home purchase because of their inability to secure a typical down payment. This program evolved as scores of Americans were trying to bounce back from the financial setbacks brought about by the Great Depression. At that time, the rate of loan defaults and foreclosures was quite high.

An FHA loan is a mortgage loan guaranteed by the Federal Housing Administration. The funds are provided by an FHA-approved lender. Over the years, and since the housing crisis of 2008, changes have occurred that make securing one of these types of loans easier than ever before. Today the program even allows home sellers, builders and lenders to pay some of the borrower’s closing costs. This helps make the FHA loan even more affordable for first time home buyers and any buyer who is on a tighter budget.

FHA loans do have certain requirements that may make them less favorable to some borrowers. The two-part mortgage insurance premiums for example, may turn some borrowers away; however, for other borrowers, the cost of the mortgage insurance is well worth the slew of other benefits available through an FHA loan.

How the FHA mortgage insurance premiums work:
Two mortgage insurance premiums are required for all FHA loans: the upfront premium and the annual premium. The upfront premium can be financed as part of the loan amount, further reducing the amount of money the borrower is responsible for paying at closing. The annual premium is calculated on a yearly basis, but is generally paid monthly. The amount of these premiums can vary based on the length and amount of the loan. Talk to your lender for details.

FHA Loan Down Payments
Home buyers who qualify for an FHA loan are in charge of securing a down payment, however, it is considerably less than the usual 10-20 percent. At the time this article was written, FHA loans required a minimum down payment of only 3.5 percent.

Paying for a home purchase through the FHA also gives the borrower a certain degree of flexibility when it comes to choosing a specific financing plan.  FHA loans can be used to finance several different property types, as well as certain home improvement projects. There are FHA loans for condos, 1- to 4-unit properties, modular homes, manufactured homes, energy efficiency upgrades and even streamline refinancing for existing FHA loans. The FHA program also offers loans that cover the cost of buying a fixer-upper and making the necessary repairs.

USDA Loans
Another excellent federally-insured program is the one created in 1949 by the U.S. Department of Agriculture. Known as the USDA Rural Housing Loan program, its goal is to stimulate economic growth and raise homeownership rates in rural areas by offering affordable financing opportunities. It is a unique loan program, because it is the only other loan aside from the VA mortgage program that offers the opportunity of a zero-money down home purchase! USDA Loans are currently active in all 50 states. As with the FHA program, approved USDA lenders match eligible borrowers with properties that have been earmarked for the funds. If recipients ever default on their loans, the USDA offers a repayment guarantee, protecting lenders from loss in the event that a borrower cannot make their mortgage payments. Since the program began, more than 2.7 million rural borrowers have become proud homeowners.

Following the enactment in 2009 of the American Recovery and Reinvestment Act, even more potential borrowers may be eligible for a USDA Rural Housing loan due to the development of more flexible guidelines. Borrowers must still meet certain income requirements and provide a credit report, however, the guidelines are not as strict as they were previously. Also, there had been a danger that 900 rural areas would lose their ability to qualify for the USDA’s program because of population growth. A new bill recently made allowances for those 900 areas to keep their status until 2020. Presently, the USDA Rural Housing loan program is available to rural areas that have up to 35,000 residents. The previous population limit was set to no more than 20,000. Many members of Congress and the National Association of Realtors heavily supported this change.

USDA Loan Fees
Just like FHA Loans, USDA Rural Housing Loans require additional fees to compenaste for the lower down payment requirement. Howevevr, the USDA does not consider these fees to be insurance premiums. Instead, they consider them more like funding fees, designed to make the program self-funding.

For USDA loans, two separate fees are required. The first is the USDA Guarantee Fee, which is a one time charge of 2% and can be financed into the final loan amount. The other fee is an annual charge of 0.3 percent of the balance of the loan. This fee is added to the borrower’s monthly payments. For details on USDA loan fees, talk to one of our mortgage professionals.

Additional USDA Loan Details
USDA loans are 30-year fixed rate loans. Adjustable rate options are not available for USDA loans. An additional benefit to USDA loans is the fact that borrowers do not have to take out monthly mortgage insurance, which can be quite expensive. For properties that are considered “fixer-uppers,” the cost of repairs may be included in the loan. These loans may also be used to refinance, as long as the property meets the USDA loan guidelines and is the primary residence of the borrower.

What so many people don’t realize is that a lot of these eligible properties are near very desirable metro areas. A quick check with the USDA’s property eligibility map allows you to view the geographic areas that meet the USDA guidelines. Many of them are in close proximity to some of the nation’s most interesting cities, such as Austin, TX; Bend, OR; or Santa Fe, NM.

Ready to learn more?
Contact one of our FHA loan experts today by calling 1-800-634-8616 or fill out the form on this page and one of our loan professionals will contact you after reviewing your information.