Buying your first home is an exciting milestone. But it also involves big financial decisions, like choosing the right mortgage Two popular options for first-time homebuyers are FHA loans and USDA loans They offer low down payments and lenient credit requirements.
But how do you know whether an FHA or USDA loan is a better fit? This comprehensive guide examines the key differences between FHA and USDA loans. We’ll compare eligibility costs interest rates, and other factors to help you make an informed choice.
FHA and USDA Loans: The Basics
First, let’s look at what makes FHA and USDA loans unique:
-
FHA loans are backed by the Federal Housing Administration. Because the FHA insures these loans, you can qualify with a credit score as low as 580 and down payment as low as 3.5%.
-
USDA loans are guaranteed by the US, Department of Agriculture They help low- to moderate-income buyers purchase homes in rural and suburban areas, USDA loans require no down payment,
Both loans are provided by private lenders but insured by government agencies. This helps buyers with less-than-perfect credit or savings get approved.
Now let’s dive into the details on eligibility, costs, and other factors to weigh when deciding between FHA vs. USDA loans.
Comparing Eligibility Requirements
FHA and USDA loans have different requirements for qualifying:
Credit scores:
-
FHA loans need a minimum credit score of 580 for 3.5% down.
-
USDA has no official minimum, but many lenders require 640+ scores.
Income limits:
-
FHA loans have no income limits.
-
USDA loans limit income to 115% of the area median income.
Down payments:
-
FHA loans need 3.5% down if your credit score is 580+ or 10% down for 500-579 scores.
-
USDA loans require 0% down.
Property location:
-
FHA loans work for any property.
-
USDA loans are only for rural areas and small towns.
As you can see, USDA loans are more restrictive in terms of location and income. But they offer the biggest down payment advantage.
Mortgage Insurance Costs
Both programs charge mortgage insurance:
-
FHA loans charge an upfront mortgage insurance premium of 1.75% of the loan amount, plus an annual premium between 0.45% and 1.05%.
-
USDA loans charge a 1% upfront guarantee fee and annual fee of 0.35% of the loan amount.
So USDA loans have lower annual mortgage insurance rates. But FHA loans could be cheaper overall if you qualify for low monthly premiums.
Interest Rates
Government backing makes both loans eligible for low interest rates. USDA and FHA loans often have:
- Rates 0.5 to 1% lower than conventional loans
- Similar rates to each other
So interest rates are unlikely to be a deciding factor between the two loans. Shop lenders to see if one program offers a better rate for your situation.
Closing Costs
FHA and USDA loans allow you to roll closing costs into the mortgage. USDA loans also let you finance up to 100% of the home’s value and use leftover funds to cover closing costs.
Either way, you can buy a home with very little cash out of pocket. Shopping lenders and negotiating the seller’s contribution can further reduce costs.
Pros and Cons of FHA and USDA Loans
To recap, here are the main advantages of each loan:
FHA loan pros
- Low minimum credit score (580)
- Low 3.5% down payment
- Available nationwide
- No income limits
USDA loan pros
- Zero down payment required
- Lower annual mortgage insurance
- 100% financing available
And here are the potential drawbacks:
FHA loan cons
- Monthly mortgage insurance for life of loan
- Upfront mortgage insurance premium
USDA loan cons
- Limited to rural/suburban areas
- Stricter income limits
- Potentially longer approval process
As you can see, there are compelling reasons to consider either loan. Make sure to get pre-approved to see which option you qualify for.
How to Choose: FHA vs USDA Loans
If you’re eligible for both, keep these tips in mind when deciding between FHA and USDA loans:
-
Compare mortgage insurance costs based on your specific loan amount and down payment.
-
Make sure you meet income limits for USDA loans in your county.
-
Check if the home you want to buy is in a USDA-eligible rural location.
-
Ask lenders to quote rate and fee estimates for each loan.
-
Opt for the loan with the lowest costs based on your down payment and credit profile.
Either FHA or USDA loans can be excellent choices for first-time home buyers. Get pre-qualified to see which one you’re eligible for, then make your decision based on affordability. With low down payments and flexible credit requirements, you’ll be on your way to homeownership in no time!
USDA vs FHA: Overview
The choice between USDA and FHA loans is often pretty easy since they’re targeted at different types of buyers.
The USDA loan program is meant to make homeownership more accessible in lower-income rural areas. Only certain locations qualify, and you have to be within income limits to apply.
The FHA loan program is more widely available. Buyers can apply in any part of the country, and there are no income restrictions to qualify. But where the FHA program really stands out is its lenient credit score requirements. Home buyers can apply with a FICO score of just 580 and 3.5% down. For this reason, FHA loans are usually recommended for borrowers with credit scores too low to qualify for a standard conforming mortgage loan.
USDA vs FHA: Eligibility
A large part of the decision between USDA vs. FHA loans will depend on which type of mortgage you qualify for. Here’s a brief overview of how USDA and FHA eligibility requirements compare.
| Criteria | FHA Loans | USDA Loans |
| Loan Requirements | Minimum credit score of 580 for 3.5% down payment Steady employment history Property must be primary residence | Must meet income eligibility Property must be in a USDA eligible area Property must be primary residence |
| Loan Limits | Vary by county, but typically up to $ for single-family homes in most areas | No set loan limit, but the home must be modest in size for the area, and cannot have luxury features |
| Income Limits | None | Usually 115% of area median income (AMI) |
| Appraisal | Required Must meet HUDs minimum property standards | Required Must meet USDAs property and location requirements |
| Down Payment | Minimum of 3.5% with a credit score of 580 or higher 10% for credit scores between 500-579 | No down payment required |
| Mortgage Insurance | Upfront mortgage insurance premium (1.75% of the loan amount) Annual mortgage insurance premium (0.45% to 1.05% of the loan amount, paid monthly) | Upfront guarantee fee (1% of the loan amount) Annual fee (0.35% of the loan amount, paid monthly) |
| Interest Rates | Vary by lender, credit score, down payment, and other factors Typically lower for borrowers with good credit | Set by the lender, but can be as low as current market rates due to government backing |
| Closing Costs | Vary by lender, but can include appraisal fees, credit report fees, lenders origination fees, etc. Can be covered by seller or lender | Can include appraisal fees, credit report fees, lenders origination fees, etc. Can be rolled into the loan amount or paid by the seller |
The FHA program offers 30-year and 15-year fixed-rate mortgages, along with adjustable-rate mortgages (ARMs). The USDA offers only a 30-year fixed-rate loan.
In addition, both programs require you to buy a primary residence, meaning you can’t use them for a vacation home or investment property. However, FHA loans can finance multi-family homes with 2, 3, or 4 units, whereas a USDA loan can be used only for a single-family home.
FHA Loan vs USDA
FAQ
Is USDA or FHA better?
What is one advantage a USDA loan has over the FHA loan ______?
Can you have a USDA and FHA loan at the same time?
For which buyer would a USDA loan be most appropriate?
How do I qualify for an FHA vs USDA loan?
Being eligible for an FHA vs. USDA loan means meeting specific requirements. To qualify for an FHA loan, prepare to: Make a down payment of at least 3.5% with a credit score of 580 or higher, or a down payment of 10% with a credit score between 500 and 579. Pay an upfront mortgage insurance premium at closing equivalent to 1.75% of the loan.
Are USDA loans better than FHA loans?
USDA loans require a higher credit score than FHA loans, and they also carry geographical restrictions for where you can buy a qualifying home. USDA loans also have income limits for prospective homeowners, while FHA loans impose no such limits.
Why are USDA and FHA loans so popular?
Home buyers with low or moderate incomes may gravitate toward mortgages with more lenient borrowing requirements, especially when it comes to down payments and mortgage insurance. This is why USDA and FHA loans can be so appealing to borrowers. How do the two types of mortgage loans differ, though?
What is the difference between FHA and USDA mortgages?
The FHA program offers 30-year and 15-year fixed-rate mortgages, along with adjustable-rate mortgages (ARMs). The USDA offers only a 30-year fixed-rate loan. In addition, both programs require you to buy a primary residence, meaning you can’t use them for a vacation home or investment property.