With the recent increase in the monthly mortgage insurance on FHA loans, USDA 100% financing is both a less expensive loan program and requires less money out of pocket when compared with the popular FHA program.
Take for example a property with a sales price of $250,000. With FHA financing, the 3.5% down payment requirement would be $8750, whereas the USDA loan would require $0 down payment. Because of the down payment, the principal and interest payment on the FHA loan would be lower, say $1234 versus $1311 for USDA (assuming a 4.5% interest rate on both programs), but the FHA loan would also have a monthly mortgage insurance payment of $180, while the USDA loan has a monthly guarantee fee of .4% annually or $85 monthly. Ignoring the tax and insurance payments which would be the same under each program, the FHA mortgage payment would be $1414 per month and the USDA payment would be $1396. Also, the total cash needed to close would be $8750 less under USDA because of the zero down payment.
What’s the catch? USDA does have income restrictions based on area the property is located in, and there are a few more appraisal restrictions on USDA loans compared to FHA, but beyond that, if a borrower is buying a property in an area where USDA financing is available, and the borrower is eligible under both programs, USDA will be a less expensive option when compared to FHA.
Baxter Scruggs is a mortgage banker specializing in USDA loans in California, NMLS #156370. He can be reached at email@example.com, 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