USDA vs. FHA Mortgage

Looking to buy a home? Want to avoid a hefty down payment? The USDA and FHA mortgage programs can help. 

Learn more about the advantages of each, and choose a program to make home ownership a reality. 

What Is a USDA Mortgage?

The Department of Agriculture (USDA) guarantees mortgages for homes in designated rural areas. While it might sound like you can only buy homes in remote areas, many eligible areas are just outside cities. Check the eligibility map to find areas near you. 

These loans are offered by private lenders approved by the USDA, and a USDA mortgage has no minimum down payment requirement. 

USDA Loan Requirements

As with any loan, you have to meet certain requirements to qualify. These include:

• Income limits. Your adjusted gross income can’t be more than 115% of your area’s median income. You can check your eligibility using the USDA website. 
• Occupancy. You must use the home as your primary residence. You can’t use a USDA mortgage for a 2nd home or an investment property. 
• Other federal loans. You must be in good standing with other federal loans like student loans. 
• Citizenship. You must be a U.S. citizen, a qualified alien or a U.S. non-citizen national. 
• Credit score. While the USDA doesn’t have a minimum credit score requirement, many lenders do. Lenders typically require a score of 640 or higher, but some lenders may allow lower scores. 
• Debt. You must have a debt-to-income (DTI) ratio of 41% or less. Your DTI ratio compares your monthly debt payments (including your potential mortgage payment) to your pre-tax income. 

Let’s say your potential mortgage, credit card minimum payments, student loan payments and car payments add up to $1,700 per month. You make $3,800 per month before taxes. This gives you a DTI ratio of 44.7% ($1,700 is 44.7% of $3,800), so you wouldn’t qualify for a USDA mortgage.

The USDA does allow a DTI ratio of 44% if you have a credit score of 680 or higher and other compensating factors like steady employment or enough savings to cover at least 3 months of mortgage payments. 

USDA Pros and Cons

What are the advantages and disadvantages of a USDA home loan? Let’s take a look. 

Pros

• No down payment requirement. This allows you to use your money to move, furnish your home, complete renovations or anything else you like. 
• Flexibility. You can use a USDA loan to build a home or buy an existing home. 
• Easy refinancing. The USDA offers a streamlined refinancing option, which allows you to refinance without an appraisal. 

Cons

• Income limits. These mortgages help low- and moderate-income borrowers, so some home buyers may not qualify. 
• Location limits. If you’re attached to urban living, a USDA loan may not be the right choice. 

The Best USDA Mortgage Lenders

Which USDA lenders are the best? Here are Benzinga’s picks. 

What Is an FHA Mortgage?

The Federal Housing Administration (FHA) insures FHA mortgages. These mortgages were started in 1934 to encourage home buying and stabilize the mortgage market. Before the FHA, mortgages were very different from the loans we have today.

They were typically less than 50% of the property value and had terms of just 5 years. At the end of 5 years, there was a big balance due. If you couldn’t pay, you had to renegotiate with the lender or lose the home. 

During the Great Depression, this led to a lot of homeowners losing their homes. The FHA was established to fix this, and it introduced long-term mortgages that were paid off at the end of the loan term. 

Today FHA loans help home buyers who have less-than-perfect credit or limited down payment funds. These qualities make it a great fit for a first-time home buyer. 

Like USDA loans, FHA mortgages are offered by approved private lenders. 

FHA Loan Requirements

What are the requirements for an FHA mortgage? They include:

• Down payment. The minimum down payment for an FHA mortgage is 3.5%.
• Credit score. You need a credit score of 580 or higher to make a down payment of 3.5%. If your credit score is 500 to 579, you must make a down payment of 10% or more. Lenders may have higher minimum credit score requirements. 
• No recent foreclosures. You typically have to wait for 3 years after a foreclosure to qualify for an FHA loan. 
• Occupancy. In most cases, the property must be your principal residence. 
• DTI ratio. FHA loans require a DTI of 43% or less. You may be able to qualify with a higher DTI, but you must have compensating factors like significant savings. 
• Loan limits. FHA loan limits vary by area. In many areas, the limit is $331,760. In high-cost areas, the limit is $765,600. In Alaska, Guam, the Virgin Islands and Hawaii, the mortgage limit is $1,148,400. You can find the loan limit for where you plan to live on the Department of Housing and Urban Development website. 
• Mortgage insurance. This insurance pays the lender if a borrower stops paying on the mortgage. The borrower has to pay for mortgage insurance, though, and FHA loans have 2 types. There are upfront mortgage insurance premiums, which are a percentage of your loan amount. These premiums can be rolled into your home loan. You also pay ongoing premiums, which you pay with your mortgage payment. 

FHA Pros and Cons

What are the benefits and drawbacks of an FHA loan? Here are several to consider. 

Pros

• Flexibility. You can use an FHA loan to buy an existing home, a 2-4 unit building, a manufactured home or a condo. You can also use an FHA loan to build a home. 
• Low down payment. While you do have to make a down payment that’s higher than a USDA loan, 3.5% is manageable for many borrowers. 
• Low credit score requirements. Life happens, and if your credit score has taken a hit, an FHA loan could be a good option. 
• Easy refinancing. FHA loans have streamlined refinancing. If you qualify, you can refinance with minimal underwriting. 
• Gift funds allowed. Have a family member, friend or organization that wants to help with your down payment? As long as you can document where the funds came from, you can use gift funds for your down payment. 

Cons

• Mortgage insurance. All FHA mortgages require mortgage insurance. Every borrower pays the upfront mortgage insurance premium. Depending on the mortgage term, if you make a down payment of more than 10 to 20%, you can stop paying annual mortgage insurance premiums after 11 years. 
• Loan limits. You can’t buy a property that exceeds the loan limits in your area. 
• Property standards. The property you’re buying must meet FHA standards for being safe, sound and secure. These standards are extensive and specific.
  
  For example, if the house has central air, it must be operational. If it’s not, the appraiser must disclose how much it would be to fix it and its impact on the house’s marketability, which could lead to the house not being approved. 

The Best FHA Mortgage Lenders

Which FHA lender should you choose? Here are Benzinga’s picks. 

Which Mortgage Is Right for You?

Choosing the right mortgage is a challenging decision. Here are a few considerations:

• Where do you want to live? If you’re looking for a home off the beaten path, a USDA loan might be a good fit. If you prefer city living, an FHA or conventional mortgage might be a better fit. 
• What are the mortgage rates? Mortgage rates should also be a part of your decision. Even a small difference in mortgage rates can save you thousands over your mortgage term. 
• How much do you have for a down payment? If you have the funds to make a larger down payment, you can lower your monthly payments and build equity in your home faster. If you have minimal funds for a down payment, a USDA or FHA loan is a good choice. If you have more, you should also consider conventional mortgages. 

You also want to choose the right lender. Consider factors like:

• Technology. Being able to complete an online mortgage application can save time and simplify the process. Does the lender have a digital mortgage process? A mobile app?
• Customer service. Does the lender respond to your questions quickly? Can you reach the lender when you need to? Does it offer your preferred communication options, whether it’s online, phone or in person?
• Education. Does the lender take the time to educate you about your loan options and the mortgage process? Does it have mortgage calculators or informative blog posts on its website? A good lender will educate you about your options so you can make an informed decision. 
• Loan options. Do you have your heart set on a USDA loan? Do you want to explore multiple loan options? Choose a lender with the options you prefer. 

Choosing the right mortgage and the right lender takes time. Talk to at least 2 or 3 lenders, and review multiple quotes to make sure you find the right mortgage. Look at the interest rates, fees and discounts. Choose a lender that provides great service and a mortgage with a competitive rate, and you’ll be on your way to homeownership. 

Frequently Asked Questions