Finding the right mortgage lender to finance your first home buy is an important decision. Today’s mortgage market is packed with home loan programs that can easily be tailored to match the specific needs. A few of the most appealing options include the FHA loan and USDA loan
Both of these mortgage programs give the option to offer a low down payment, but apart from that, there are a variety of differences.
What are the highlights of the USDA and FHA loan options?
Down payment – 3.5% for FHA loans, no payment required for USDA loans
Home location – FHA homes have no restriction on home location, while certain restrictions are in place for USDA loans.
Mortgage insurance – the premium for mortgage insurance are cheaper with USDA loans.
Income limitation – the FHA loan has no cap in place, while the USDA does.
Rebound buyers – buyers are likely to see more favored term for an FHA loan after a foreclosure.
Even though the USDA rural home loans aren’t as well known as the FHA loans, they are starting to gain a lot of traction in the market for first-time buyers. The option for no down-payment is very appealing and the interest rates aren’t much different to the FHA loan.
Let’s take a look at a few of the most appealing features of these home loan programs:
A very favorable aspect of the USDA loans is the no down payment requirement. This gives the option to borrow the full 100 percent of the home value, which can even include the fees related to closing costs, homeowner’s insurance or prepay property taxes.
The ability to cover the expense of most fees such as closing costs is certain to be appreciated by most first-time buyers because this can easily reach thousands of dollars.
So, this essentially means a potential buyer can literally buy a home without needing to cover the cost of any expenses from their personal bank account.
Alternatively, the first-time home buyers looking to apply for an FHA loan will need to save up a minimum down payment of 3.5% based on the purchase price. There is no option to get a no out of expense loan with the FHA – although there is a down payment gift, which basically means a friend or family member offers the funds to cover this payment.
However, out of the two options the USDA loan program is the most flexible and the preferred option for those with little available cash or savings.
The USDA is a type of home loan program that intends to encourage the first-time buyers to invest in a property that is in a rural area and outside a major city location. However, the eligibility defined by the USDA is quite wide. In fact, it includes plenty of suburban areas across the country. Over 95% of the available landscape in the US is applicable for this type of loan.
For the first-time buyers that want complete freedom in a location with no geographical restrictions, the FHA loan is certain to be the preferred option. A major reason to use the FHA loans is when the define areas stated in the USDA program are too far from a place of employment.
The aim of the USDA loan is to encourage buyers to invest in property in a rural area. It is particularly useful for first-time buyers or others that wouldn’t normally qualify for a home loan.
A standard part of these rural development loans is the stated income limits. This is calculated at 115% of the average income for a particular area or country. At this level, the limits are quite non-restrictive and widely available to many would-be home buyers. For instance, in Albany County, WY, this would amount to $85,700, in Philadelphia, PA, it is $93,750, and in Denver, CO it is $94,600.
In the event of not being able to fit within the income limits, the best alternative home loan option is the FHA loans. No applicable income limits apply for this loan type which means it is more widely available.
Neither the USDA loans nor FHA loans have a rule in place that the person interested is a first-time buyer. However, there is a requirement that no satisfactory housing is owned within a short distance of the new property. Also, there must be the intention to live full time in the new home.
Buying properties for the purpose of investment or rental isn’t an option under the USDA loans or FHA loans. The intention of both of these loan programs is to make it possible to get a family into their own home.
Anything that is likely to relate to an investor creating a portfolio of properties is certain to be stopped from using this type of loan.
Mortgage insurance premiums
A standard requirement of both the USDA or FHA programs is the need to pay the mortgage insurance premiums. This homeowner related payment helps to keep the respective programs open for future buyers. Typically, the rates quoted on the USDA loans for mortgage insurance and cheaper compared to the standard cost of FHA.
Ease of qualifying
The USDA mortgage doesn’t apply a maximum loan size. Instead, the lender will look at your household debt-to-income ratio to establish the total sum that can be borrowed. The debt-to-income ratio is simply the difference between in the gross income and monthly debt/bill payments.
For instance, the would-be buyer with a monthly income of $6,000 and has debt/bill payments of $2,000, has a debt-to-income ratio of 33%. In general, the debt-to-income ratio of the USDA loans is limited to about 41%. However, this can increase in certain situations, such as having a good credit score of 660 or more, a solid employment history, and a decent amount of savings. With the right compensating factors, the ability to apply and get approved for a loan program is significantly improved.