You decided to buy a home – congratulations! Now comes the harder decisions. What type of financing should you get? You have likely heard that FHA loans are great first-time homebuyer loans. That much is true. But, did you know that USDA loans are also a great option?
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They are both government-backed loans, which means flexible guidelines and low interest rates. So how do you know which one is right for you?
Keep reading to figure it out.
The Benefits of FHA Loans
FHA loans have many benefits. They were once known as the ‘first-time homebuyer’s loan.’ Today, however, they are a great option for almost anyone. Here are a few benefits you’ll realize as a first-time homebuyer though:
- Low 3.5% down payment requirement
- Minimum credit score requirement of 580 (one of the lowest requirements in the industry)
- You can buy a home in any area, there’s no location restrictions
- There are no income limits
FHA loans require a small 3.5% down payment and a low credit score of just 580. You don’t have to meet income guidelines. As long as your debt ratio is around 31% up front and 43% on the back, you are in good shape for an FHA loan.
On a $200,000 loan, you would need to put down $7,000. You’d pay standard closing costs and an upfront mortgage insurance fee of $3,500. You would also pay $142 per month for annual mortgage insurance.
The Benefits of USDA Loans
USDA loans have certain benefits as well, as long as you buy a home in a rural area. The USDA’s definition of rural is a little looser than you are probably thinking, though. You don’t have to be surrounded by cornfields and be hours away from the local grocery store. The USDA map shows you that a large portion of the United States is in a rural area according to their standards.
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A few of the benefits of the USDA loan include:
- No down payment requirement
- You can wrap your closing costs into the loan
- Minimum credit score requirement of 640
- Low upfront mortgage insurance fees
USDA loans are unique because they provide 100% financing. However, their credit score requirements are a little higher than that of the FHA. They also only lend to low or middle income families. In order to be eligible for the program, you must disclose the income of every adult in your household even if they aren’t going to be on the loan. If your family’s income exceeds the USDA guidelines, you are ineligible for the program.
Assuming you are eligible for the program, a $200,000 loan would cost you nothing at the closing if you so choose. You don’t have to make a down payment and you can roll the closing costs into the loan. It would cost you $2,000 for the upfront mortgage insurance fee, but again, you can wrap that into your loan. It would also cost you $58 per month in annual mortgage insurance.
What Should You Decide?
Both programs sound pretty attractive, so which one do you choose? It depends on your circumstances. You can start with the location of the home. Are you the type to live in a rural area? If not, you can rule out the USDA loan and move on to the FHA loan.
If you are good with living in a rural area, you need to ask yourself a few other questions.
- Do you have at least a 640 credit score? If you don’t you won’t qualify for the USDA loan. Because they provide 100% financing, they have to require slightly higher credit scores.
- Does your family household income exceed the limits for your area? If so, you’ll have to use the FHA program, which does not have income restrictions.
If you don’t meet the USDA guidelines or you are not going to move to a rural area, the FHA loan is a great option. If you don’t have the 3.5% to put down on the home, you can always accept gift funds from a relative or your employer. If you have someone that can help you with the down payment and/or closing costs, the FHA loan can be a great way to get the home you want, as much as the USDA loan can help.