Compare USDA to FHA Home Loan Mortgage Program
Ask Kate to compare FHA financing to USDA Rural Home Loans: Jeanine is buying a home for herself where she'll also care for her elderly mother. Jeanine asks which mortgage program is a better deal - USDA Rural Home Loan (United States Department of Agriculture) or FHA (Federal Housing Administration). In response to her question, I break down the loans into 11 categories as a helpful comparison tool.
Ask Kate: USDA Rural Home Loans vs FHA Mortgage Financing By Jeanine
Dear Kate, I am learning every time I read your website!
My lender has informed me that my 89 year old mother cannot have a loan on her house for repairs and be included in the household income on my FHA loan.
I will be taking care of my mother in my new home. Her house is paid for and we've filed a quit claim deed. My 4 siblings and I are responsible for her, NOT a nursing home, and intend to care for her.
I've been approved for a mortgage of $175,000. With Mother's added income, it would bump up to $271,000.
What about a USDA Rural Home Loan makes it the better route? I am so confused at this point.
Thank you for your time and appreciate your insight.
Kate's Answer: USDA Rural Home Loans vs FHA Mortgage Financing
Thank you for your kind words!
I am happy to know you find Ask Kate
I'm also happy to hear that you are thinking of two tried-and-tested low down payment mortgage programs. But which program is better? USDA Rural Home Loans or FHA financing?
11 Ways to Compare USDA Rural Home Loans to FHA Financing
Well, it depends. So, let's break down the programs into 11 sections (as of July 2015) so you can compare guidelines.
1: Compare Borrower Eligibility
USDA and FHA financing are both restricted to primary owner-occupied home loans vs mortgages for rental properties. First time home buyers and repeat borrowers alike are eligible to apply.
2: Compare Credit Requirements
USDA Rural Home Loans generally set the minimum credit score at the mid 600s while FHA is a slightly more forgiving of a bruised credit history.
3: Compare Down Payments
FHA down payments are calculated with a convoluted formula which equals approximately 3.5 percent of the purchase price. For example, 3.5 percent of $200,00 is $7,000. (Don't even get me started on the government's insistence on using a formula instead of a simple percentage!)
But USDA has no down payment. Yep, zero, zip, zilch down payment!
4: Compare Annual Mortgage Insurance - Paid Monthly FHA charges .85 percent for mortgage insurance (MI) on its most common financing
. For example, on a $200,000 mortgage, you'd pay approximately $141 a month in your house payment.
USDA Rural Home Loans charges .5 percent. For example, on a $200,000 mortgage, you'd pay approximately $83 a month in your house payment.
5: Compare Upfront FHA Mortgage Insurance vs USDA Guarantee Fee - Financed
USDA charges a 2 percent guarantee fee to cover program expense. For example, the guarantee fee for a $200,00 loan amount is $4,000.
Similarly, FHA charges upfront mortgage insurance at 1.75 percent of the loan amount. For example, upfront FHA mortgage insurance for a $200,00 loan amount is $3,500.
Both programs generally finance the upfront MI in the loan amount.
6: Compare Debt-to-Income Ratios
To determine an applicant's ability to repay a mortgage, both programs calculate two sets of debt ratios, 29 percent of qualified income being allowed for the housing expense and 41 percent for housing plus recurring debt payments. But FHA has more wiggle room than USDA.
7: Compare Income Restrictions
For both programs, income must be sufficient to support the proposed mortgage payment. However there is a maximum amount of income borrowers are allowed to make and still qualify for USDA Rural Home Loans, depending on the size of the family and where the property is located.
8: Compare Geographical Restrictions
Only rural areas are qualified for USDA home loans. But again, don't assume you know what the government considers rural and write off the program before contacting an approved lender.
The amount you are allowed to borrow under FHA varies between counties. Go here for more information: Maximum FHA Loan Limits
9: Compare Appraisals
Both programs require a market appraisal for home purchases. Home inspections are strongly encouraged also. See why here: Why FHA Appraisal Is Not Enough: Your Home Inspection Report
10: Compare Availability of Funds
Unlike FHA, a shortage can occur in USDA funds. In that case, home buyer applicants are placed on a waiting list with priority given to first time home buyers and veterans.
11: Compare Loan Term, Mortgage Rates and Closing Costs
30 year fixed rate mortgage terms are the most common for both programs. The best way to compare mortgage rates and closing costs is to ask for breakdown IN WRITING! More on this here: Mortgage Closing Costs Explained
More USDA Rural Home Loan and First Time Home Buyer Information USDA Refinance: No Appraisal, No Equity, No Credit Report, No Debt-to-Income Ratio Calculations
- Now there is good news for middle class homeowners currently financed with an underwater USDA guaranteed mortgage. - USDA Refinance No Appraisal No Credit Report No Debt-to-Income Ratio
.USDA Rural Home Loans: Zero Down Payment Mortgage
- If a zero down payment, competitive fixed rate for 30 years, affordable Guarantee fee, no mortgage insurance, and never a prepayment penalty sounds attractive, let's discuss a niche program which many home buyers ignore, mistakenly assuming it is restricted to farm residences. USDA Rural Home Loans: Zero Down PaymentAsk Kate about First Time Home Buyer's Programs
- Three home buyers look for answers as they prepare for homeownership. 1) Kiersten wants to know about averaging income to qualify for first time home buyer financing. 2) A retired Canadian who hopes to buy a U.S. home asks for thoughts on FHA loan requirements. 3) A third buyer has questions about Fannie Mae HomePath and Freddie Mac HomeSteps programs for buying foreclosure homes. - Ask Kate about First Time Home Buyers Programs
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