FHA or USDA Home Loan: Which is Better for You?

USDA and FHA are two of the most sought home loan programs in the US. Though there is no doubt that both USDA and FHA home loans have a number of benefits over most home loan options, the actual confusion arises when borrowers have to make their final pick between the two. If you are also unsure about the way to go, we list some of the factors to consider to determine which home loan option is a better proposition for you.

Down Payment

When planning to buy a house through a home loan, the biggest concern for homebuyers is the down payment. Both FHA and USDA home loan programs have relaxed down-payment requirements. The USDA home loans, however, have an edge over FHA loans - they do not require any down payment. FHA loans, on the other hand, require a minimum down-payment of 3.5 percent of the total purchase price.

Closing Costs

Both FHA and USDA loans allow sellers to bear up to six percent of the closing costs, with the remaining amount to be paid by the buyer. They also allow buyers to roll their closing costs into the loan amount. The difference, however, is that in an FHA loan, the maximum loan amount (inclusive of closing costs) cannot exceed 96.5 percent, whereas in a USDA loan, the borrower can get a loan amount equivalent to the appraised value of the home. In short, the amount of loan you may borrow in a USDA loan is more as compared to FHA loans.

Credit Score Requirements

The minimum credit score required for getting an automated approval for obtaining a USDA loan is 640. Those who have a debt to income ratio that exceeds the 29:41 ratio, the credit score requirement is 680. The FHA loans, on the other hand, are much easier to obtain as they have relaxed credit score requirements. Those interested in an FHA loan require a credit score of 580. If the applicant’s score is less than that, they need to put in extra for down-payment.

Area Limitations

FHA loans do not have any geographic area restrictions. The FHA loan limit, however, may vary depending on the region and location where the house or property is located. In the case of USDA home loans, these are available only for the properties that are located in an area designated as “rural area” by the USDA. To check the list of designated areas you may visit the USDA website.

Income Limitations

Income is one of the major determining factors whether an applicant qualifies for a loan, and if they do, what is the amount they can obtain. There is a common misconception that FHA loans have a ‘maximum income cap’ criterion. The USDA loans, on the other hand, are for low and moderate income buyers only. To obtain a USDA loan, the applicant’s income should be less than or equal to 115 percent of the median income of the designated rural area where they plan to purchase the house.

Last Few Words

The above mentioned factors will give you a fair idea whether an FHA loan suits your requirements better or a USDA loan does. In addition to these, there are many factors that may or may not be relevant to all borrowers. To get a detailed comparison between the two loan types and get help in determining which loan suits your requirements better, contact one of our mortgage experts today.


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