When choosing a loan program, it’s important to understand your options. Let’s take a look at two different types of popular government loan programs – FHA loans and USDA loans – and how they compare to one another.
Weighing Your Options: FHA Loans vs. USDA Loans
Government mortgages are backed by the government, as their name indicates, meaning that the government ensures repayment to the bank or lender if you happen to default on your mortgage payment. This means that these types of loans often have more flexible qualification requirements that tend to be easier to meet than those of conventional loans, which are not backed by the government.
If you qualify for a government mortgage, there are a few options to choose from – specifically, FHA loans, USDA loans, and VA loans.
Here, we will take a brief look at some of the key features of FHA loans and USDA loans so you can compare and contrast these two options. (VA loans are only available to those who have served in the military, are currently serving in the military, or to surviving spouses of military members. If you think you might qualify for a VA loan, you can find more information about VA loan benefits, eligibility requirements and more here.)
FHA Seller’s Concession – Up to 6% of the Sales Price
FHA Upfront Mortgage Premium – 1.75% of the Loan Amount
FHA Monthly Mortgage Insurance – 0.85% of the Loan Amount for a 30 year loan (for most borrowers)
FHA Mortgage Rates – very comparable with USDA Mortgage Rates. Factors such as credit scores that may affect these rates.
FHA Income Limits – None
FHA Loan Size Limitations – These limitations are county-specific. For example, a One-Family in the Albany-Schenectady-Troy area is limited up to $356,362. A two family is limited up to $456,275.
FHA Unit Limitations – FHA Allows Mortgages on 1 Unit, 2 Unit, 3 Unit, and 4 Unit properties
FHA Property or Area Limitations – None
FHA Non Owner Occupied Borrowers – FHA will allow a non-owner occupied co-borrower who is a close relative to help qualify for the loan
FHA Mortgages must pass a HUD Approved Appraisal Inspection
USDA’s Seller’s Concession – You can use seller’s concession and closing costs can be rolled into the loan amount as long as the appraisal is high enough to match the new loan amount. You can also finance up to the full appraised value.
USDA Upfront Mortgage Premium – 1% of the Loan Amount
USDA Monthly Mortgage Insurance – 0.35% of the Loan Amount
USDA Income Limits – These limitations are county-specific. For example, household income on a family of 1-4 in Albany County cannot exceed $111,550. Increases to $147,250 on a family of 5-8. (Child care expenses may be able to be reduced from income)
USDA Loan Size Limitations – None. However, you have to qualify with debt-to-income ratio without going over the USDA income limits.
USDA Unit Limitations – USDA will only allow mortgages on 1 unit (single family) properties
USDA Property or Area Limitations – USDA has a specific map that it uses in order to determine whether or not a property is eligible for USDA. Generally, rural areas are considered eligible where cities are not, however, the map that they provide shows you exactly what property is eligible. The USDA property eligibility map can be found here.
USDA Non Owner Occupied Borrowers – USDA will not allow a non-owner occupied co-borrower to help qualify for the loan
USDA Mortgages must pass a HUD approved appraisal inspection
Choosing the Government Mortgage Option That’s Right For You
There are some key differences between FHA and USDA loans to carefully consider when working towards an understanding of which loan program is most appropriate for you. Keep in mind that not all borrowers will qualify for both loan programs and not all areas are eligible.
Speaking with a mortgage loan originator will help you to understand what you qualify for. While you may be interested in a government-backed home loan, it may turn out that other loan options, such as a conventional loan, could be the best option for you. Working with a mortgage broker can help you to identify the options you should be strongly considering based on your financial situation, the location where you’re hoping to buy a home, and other factors.
Interested in Exploring Your Mortgage Options?
Our team of mortgage professionals would be happy to meet with you and help you understand which mortgage options are best suited to help you purchase a home. As a mortgage broker, we have access to a wide variety of mortgage programs. Working with you, we can determine which option works best based on your financial and home goals, then help you secure a home loan at a competitive rate.