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FHA Loans vs USDA Loans

What is better between a FHA home loan and USDA home loan?
Compare loan terms such as down payment requirements and mortgage insurance.

FHA Loans vs USDA Loans – Which is Better?

This depends on the individual borrower and the property you want to buy. The first step is to see if you qualify for both. The fact USDA loans are restricted to rural/suburban properties and have strict income limits, means many people will not be eligible.

If you do qualify for both types of loans, you will want to compare the pros and cons USDA loans, and the pros and cons of FHA loans, and see which is a better fit for you.

Below is a quick guide to assist you in determining what might be the best loan option for your household.  There are some of the same advantages shared by both, such as having no prepayment penalties.

Property Eligibility – A major restriction for USDA loans is that they are only available in select areas, such as rural and suburban areas.  This is a significant limitation for someone interested in a particular house, neighborhood, or city that USDA loans are not available in.  FHA loans are available in all 50 states in cities, suburbs, and rural areas.  There are some property requirements such as only certain approved condos and townhomes, but overall they are available everywhere.  If you want to live in an area eligible for both types of loans, then this won’t matter, otherwise FHA would certainly win when it comes to geographical freedom for where you buy.

Loan Limits – FHA loan limits are set at the county level and vary from one location to the next, so if you want to buy a larger home and can qualify (meaning you have the income for the mortgage payment, but your income limits don’t exceed the maximum amounts outlined above) a USDA loan might be best.  There are no set loan limits for USDA, it boils down to how much you can qualify for based on your debt-to-income ratios.  The fact that you can not make too much money and still qualify for a USDA loan would mean you can not buy a gigantic or expensive luxury home.  The limitations would be how much home you can afford up to your qualification DTI ratio.

Down Payment – The down payment requirements for a FHA loan is 3.5%, versus 0% (no money down) for a USDA loan.  If you are looking for the lowest down payment (with no down payment of course being the lowest possible option), a USDA loan will be your best bet.  FHA does allow down payment assistance, but even with assistance, you would be required to pay at least 0.5% of your down payment.

Credit Requirements – FHA loans can often be obtained from a lender with a credit score as low as 580.  Our FHA guidelines require a 620 credit score though.  USDA loans usually require a 640 credit score, but we permit 620 or higher.  So as far as our program requirements are concerned, the minimum credit score is the same for both USDA and FHA.

Debt-to-Income Ratios – The DTI ratios for FHA is 43% and for USDA loans is 47%.  If your debt-to-income ratio exceeds the FHA amount allowed, you may still be able to qualify if you meet FHA compensating factors.  Same for USDA loans, if your score is too high, you might qualify with sufficient USDA compensating factors being considered.

Mortgage Insurance – The upfront guarantee fee for FHA is 1.75%, whereas it is 2.75% for USDA loans. The ongoing monthly mortgage insurance for FHA loans is 0.80%, and for USDA loans it is 0.50%. Assuming you qualify for both, you should compare the loan amount and mortgage insurance costs to see which loan will be cheapest for you in the long run.  The best way to determine which loan would be cheaper over the long run is to use both our USDA loan calculator (featured below) and our FHA loan calculator (also featured below), and then compare.  If you would prefer for us to calculate and present your options to you we would be happy to do so.

Loan Refinancing – Both USDA and FHA have a streamline refinance program which is an easy and very affordable way to reduce your monthly payments.  As far as cash out refinancing goes, there is no such program that exists for USDA loans.  For FHA loans, you can cash out refinance up to 85% of the equity in your home.  You may refinance a USDA loan into a FHA loan in the future though, and take cash out when you do so.

Use both of our calculators below to see what an expected payment will be with both types of loans.  You can also see how much the upfront mortgage insurance and monthly mortgage insurance will cost.  The best way to find out what you can qualify for us to get pre-approved, which will include details of each and every program you are eligible for.  We can simplify things for you and show you want your best option is.

FHA Calculator – Mortgage Payment + Mortgage Insurance

FHA Mortgage Calculator

%

Total Monthly Payment

$0

FHA base loan amount$0
FHA upfront MIP 1.75%$0
FHA total loan amount$0
Principal & interest$0
FHA MIP 0%$0
Monthly escrow$0
Down payment0%

  • Price of Home – Enter the price of the home you want to buy. If you do not have a home in mind yet, just add in a number in the range you expect to want to buy a home for.
  • Mortgage – The second field titled “mortgage”, is by default on a 30 year fixed loan schedule. This is the most common loan repayment schedule selected for FHA loans. You can change it to 20 years, 15 years, or 10 years if you want a shorter loan amortization.
  • Interest Rate – The interest rate a borrower receives depends on their credit, income, and other qualifying factors. To get an actual rate quote, you will need to speak with a licensed loan officer. You can call 1-800-731-3560 to speak with a loan specialist to get prequalified and receive a rate quote.
  • Down Payment – FHA loans require a 3.5% down payment. If you would like to put more down, add in more into the down payment field. Please note that not everyone will qualify for a 3.5% down payment, and of course, not all applicants are approved for a loan at all. The 3.5% is the amount that many FHA loan applicants will be allowed as a minimum down payment.
  • Property Taxes – Add the annual taxes for the home you want to buy. To find out how much the annual property taxes are, check with the county assessor. You can also ask a real estate agent to help you find out what the exact annual property taxes are for a home you are interested in.
  • Annual Insurance – The amount that the annual homeowners insurance will cost depends on the property you intend to buy, your homeowners insurance claim history (if you have owned a home before, and had to make a claim), and the specific homeowners insurance company that you select to insure your home.
  • Down Payment – This is the percentage that is calculated based upon the home purchase price and the down payment amount.

After submitting information into these fields, it will calculate how much the FHA mortgage payment will be based upon these numbers. The next set of data presented on the right side and shows under the total monthly payment is as follows:

  • FHA Base Loan Amount -This is the amount of your loan after subtracting your down payment from the total, but prior to adding in the FHA upfront mortgage insurance premium (UPMIP).
  • FHA Upfront MIP – All FHA loans require a 1.75% upfront mortgage insurance premium to be paid. This is calculated from the base loan amount. This 1.75% is the same for any borrower and on any type of FHA loan. It does not vary from one FHA lender to another.
  • FHA Total Loan Amount – This is the combined total of your FHA base loan amount (after subtracting the down payment), along with the FHA UPMIP. You have the option to pay the FHA UPMIP amount out of pocket, or you can wrap it into the loan amount. Most decide to include it in the loan amount, so we have it automatically added on the calculator.
  • Principle and Interest – This is the amount of your mortgage payment before adding mortgage insurance, and property taxes, and property insurance.
  • FHA MIP – This is the monthly mortgage insurance premiums required on all FHA loans. The amount depends on the type of loan, how many years the repayment schedule is (such as 15 years or 30 years), and the loan-to-value (LTV) ratio. A 15 year loan with a LTV less than 90%, the monthly MIP will be 0.45%. A 15 year loan with a LTV greater than 90%, the monthly MIP will be 0.70%. For a 30 year loan with a LTV less than 95% the monthly MIP is 0.80%. For a 30 year loan with a LTV greater than 95%, the monthly MIP is 0.85%.
  • Monthly Escrow – This is how much your property taxes and property insurance is after taking the annual amounts and dividing them by 12 monthly payments.

Would you like to receive more information or apply for a FHA loan?

USDA Calculator – Mortgage Payment + Mortgage Insurance

USDA Mortgage Calculator

%

Total Monthly Payment

$0

USDA base loan amount$0
USDA MIP $0
USDA total loan amount$0
Principal & interest$0
USDA guarantee fee 2.75%$0
Monthly escrow$0
Down payment0%

  • Price of Home – Enter the price of the home you want to buy. If you do not have a home in mind yet, just add in a number in the range you expect to want to buy a home for.
  • Mortgage – The second field titled “mortgage”, is by default on a 30 year fixed loan schedule.  This is the most common loan repayment schedule selected for USDA loans.  You can also select a 15 year mortgage.
  • Interest Rate – The interest rate a borrower receives depends on their credit, income, and other qualifying factors.  To get an actual rate quote, you will need to speak with a licensed loan officer.  You can call 1-800-731-3560 to get prequalified and receive a rate quote.
  • Down Payment – USDA loans do not require a down payment. If you would like to put money down, reduce the amount you put into the Price of Home field to reflect how much you want to use as a down payment. So if you want to buy a $150,000 home, and plan to put $10,000 down, then add in $140,000 for the Price of Home, which will serve as your total loan amount for the purpose of calculating your expected payment.
  • Property Taxes – Add the annual taxes for the home you want to buy.  To find out how much the annual property taxes are, check with the county assessor.  You can also ask a real estate agent to help you find out what the exact annual property taxes are for a home you are interested in.
  • Annual Insurance – The amount that the annual homeowners insurance will cost depends on the property you intend to buy, your homeowners insurance claim history (if you have owned a home before, and had to make a claim), and the specific homeowners insurance company that you select to insure your home.
  • Down Payment – This is the percentage that is calculated based upon the home purchase price and the down payment amount.

After submitting information into these fields, it will calculate how much the USDA mortgage payment will be based upon these numbers.  The next set of data presented on the right side and shows under the total monthly payment is as follows:

  • USDA Base Loan Amount -This is the amount of your loan after subtracting your down payment from the total, but prior to adding in the USDA upfront mortgage insurance premium (UPMIP).
  • USDA Upfront Mortgage Insurance – All USDA loans require a 2.00% upfront mortgage insurance premium to be paid. This is calculated from the base loan amount. This 2.00% is the same for any borrower and on any type of USDA loan. It does not vary from one lender to another.
  • USDA Total Loan Amount – This is the combined total of your USDA base loan amount (after subtracting the down payment), along with the upfront mortgage insurance fee. You have the option to pay the mortgage insurance amount out of pocket, or you can wrap it into the loan amount.  Most decide to include it in the loan amount, so we have it automatically added on the calculator.
  • Principle and Interest – This is the amount of your mortgage payment before adding mortgage insurance, and property taxes, and property insurance.
  • USDA Monthly Mortgage Insurance – This is the monthly mortgage insurance premiums required on all USDA loans.  This amount is 0.40% of the principle loan balance. It is recalculated each year and goes down as your loan balance does.
  • Monthly Escrow – This is how much your property taxes and property insurance is after taking the annual amounts and dividing them by 12 monthly payments.

Would you like to receive more information or apply for a USDA loan?

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