Loan Modification

FHA vs USDA: Which is better for you?

By Gina Pogol

In many parts of the country, home buyers can choose between USDA and FHA programs. If you’re one of them, run through this checklist to see which program best meets your needs.

Property

USDA loans require that its financed properties be located in areas designated “rural.” That doesn’t mean miles from nowhere; it just means outside major metropolitan areas. For example, I live just south of Reno and am in a designated rural area — 5 minutes from a city of over 350,000 people! You can find out if a property is located in a designated rural area by typing it into the USDA’s property eligibility screen.  The FHA does not restrict properties by area, but does require the property pass an inspection. Condominium projects must be FHA-approved.

Borrowers

FHA imposes no income eligibility requirements. USDA requires borrowers earn less than 80% of the adjusted median income for their household size to get a subsidized mortgage funded directly by the government, and less than or equal to 115% of the median for a guaranteed mortgage at market rates from a private lender.  You can see if you meet income limits by checking the income eligibility screen of the USDA Rural Housing Web site.

Costs

USDA mortgages require no down payment at all for the purchase of a modest sized and moderately priced home. USDA does impose a fee of 3.5% that can be rolled into the loan. There is no mortgage insurance. FHA mortgages require down payments of 3.5% for borrowers with credit scores of at least 580, and 10% down for those with scores of 500-579. FHA charges an upfront mortgage insurance premium of 1% and monthly mortgage insurance premiums calculated at 1.15% of the mortgage balance per year.

Here’s a comparison of a USDA vs FHA mortgage on a $200,000 loan.

USDA

Sales price: $200,000

USDA funding fee: $7,000

Loan amount: $200,000

Payment for guaranteed loan at 5%: $1,073.64

Payment if funding fee is financed: $1,111.22

Payment for direct loan (33 year term, financed funding fee, 4.5% subsidized rate: $1,004.37

FHA

3.5% down payment required, 1% upfront mortgage insurance premium can be financed

Loan amount: $195,000

Payment at 5% rate: $1,046.80

Add 1.15% mortgage insurance: $186.88 per month

Total payment: $ 1,233.68

While it looks like FHA is the better deal, there are some times when it isn’t.  An FHA borrower putting down 3.5% has $7,000 equity in the property right away while the USDA borrower has nothing. It takes over 43 months of higher FHA payments to make up that difference. In addition, FHA imposes mortgage limits but does not state that your home cannot have features considered luxury items like swimming pools. FHA may allow you to buy a more expensive home than USDA. In short, USDA financing is simular to what FHA may become if the government decides to scale back its involvement in American mortgage financing — with its availability limited to low- to moderate-income borrowers purchasing modest homes.

Full post as published by FHA Mortgage Guide on March 15, 2011 (boomark / email).