Those looking for a low to no down payment mortgage have options. From VA loans to HomeReady Loans to loans only available via the state, there are many different mortgages available for those who do not have the traditional 20% down payment.
The most common of these home loans is the FHA loan, backed by the Federal Housing Authority. But there is another type of loan available that you may want to consider – the USDA loan.
Where USDA Loans Beat FHA Loans
USDA loans are available in what are considered “rural areas.” These may include some cities that are not traditionally considered to be rural, but are listed that way by the USDA. Compared to FHA Loans, USDA loans may have several advantages, including:
- 0% Down – USDA loans may not require any down payment at all. This is designed to encourage home ownership in rural areas.
- Additional Financing – Your loan isn’t limited to the value of the home either. If a home appraises for more than the sale price, you are allowed to finance the additional appraisal amount, and use that for upgrades or closing costs. In other words, if the home appraises for $175,000, and your offer was only $160,000, you can still finance the additional $15,000 and pay closing fees, make improvements to the home, and more.
- More Affordable Mortgage Insurance – USDA loans have more affordable mortgage insurance than FHA loans. In fact, most FHA mortgage insurance is over 2x the USDA loan insurance costs.
These advantages make USDA loans an intriguing choice when both are available in the area.
Where FHA Loans Beat USDA Loans
Although USDA loans do have many advantages, they are imperfect. There are several advantages that FHA has over USDA, including:
- Location – USDA loans are only available in designated rural areas. In all other cities and towns, USDA loans are not available, and FHA loans are the only option.
- Income Limits – USDA has income limits, which are set at 115% the median income of the area. For areas with a very low median income, it’s possible that your income is too high to qualify for USDA.
While this may not seem like many advantages, those that are moving into the city, and those that make a higher income, may find that they simply do not qualify for USDA loans, and FHA is the only option.
Which is Better?
USDA loans seem to have more advantages for borrowers, but determining which is better is going to depend a little on the house you want, your income, where it is located, and potentially some of the more specific debt and payments you receive. To learn which loan is right for you, contact me today!