Both the USDA and FHA home loan programs are excellent programs that help thousands of people attain home ownership each year. While FHA financing is available nationwide, the USDA program is available only in designated areas (click “eligible areas” in the above navigation bar to check specific properties). If you are in an area where both types of financing are available, you may wonder which program is preferable. This answer to this can depend on a number of factors including the property characteristics, whether you own other property, and how much money you have to work with.
The primary differences between the FHA and USDA loan programs are as follows:
FHA requires a 3.5% down payment, while USDA requires zero down payment.
FHA has both “up front” mortgage insurance which is financed into the loan, and “monthly” mortgage insurance which is paid with the monthly payment. USDA has a one time up front “guarantee” fee which is financed into the loan amount, and a smaller monthly guaratnee fee than FHA. Although the up front fee is higher on USDA loans, because the monthly fee is lower, the USDA loan will usually have an overall lower payment.
FHA borrowers must either pay their closing costs out-of-pocket, or negotiate the seller to pay the costs for them. On USDA, the costs can be paid out-of-pocket, be paid by the seller, OR they can be added to the loan amount if the appraised value comes in higher than the sales price on a purchase transaction.
FHA requires the property to have no “health and safety” issues, but otherwise all types of residential properties are eligible up to 4 units, as long as one of the units is owner occupied. USDA is limited to single family homes only, and the property can’t have any other structures on it (other living units, large workshops, barns, etc. ) or income producing capabilities.
FHA allows someone to own a property and use an FHA loan to purchase another one (restrictions apply). USDA allows another property to be owned but it must not be within commuting distance to a person’s job.
The bottom line is if you are looking for the lower monthly payment, USDA will give you that. If you are looking for the least amount of money out-of-pocket, USDA will give you that too. But just in case you get hooked by one of USDA’s specific restrictions (income, property, etc.), it’s always good to have FHA on standby as a back up.
Baxter Scruggs is a mortgage banker specializing in USDA loans in California, NMLS #156370. He can be reached at firstname.lastname@example.org, or at 760-497-7705, or toll-free at 877-347-0004, ext. 226. Licensed by the California Department of Business Oversight under the California Residential Mortgage Lending Act. The blog postings on this site represent the positions, strategies or opinions of the author and do not necessarily represent the positions, strategies or opinions of Guild Mortgage Company or its affiliates. Terms and conditions apply, all loans subject to underwriter approval. Subject to change without notice. Guild Mortgage Company NMLS #3274