The USDA loans and FHA loans are very good options for both low-income and first-time homebuyers. Each of them has its own advantages and disadvantages and is often oriented to different customer populations.
At Ebenezer Mortgage Solutions, we understand that it may be confusing to decide which loan program is best for you. To help you with this, we want to show you the important differences between both of them.
First off, both programs are offered by government organizations. For FHA, it’s the Federal Housing Administration, and for USDA, the United States Department of Agriculture. These organizations will protect the lender if you ever default on your loan. This is the reason why lenders can provide better loan terms to borrowers entering through these programs—making them more appealing to people with low-to-moderate income.
Although there is a slight difference in terms of eligibility, both FHA and USDA loans are easy to qualify for. Both programs don’t require a large down payment and offer low-interest rates. However, these two programs would require you to pay Mortgage Insurance Premium and live in the house you’re buying as your primary residence.
The USDA loan program was created to promote homeownership in rural areas. One of the requirements is that the house you’re buying should be located in rural areas. Your loan company will check whether the location of your home satisfies the requirements described by the USDA. You might think that when it says “rural”, you’ll be living in an underdeveloped location. You don’t have to worry about that. As long as it’s located 50 or more miles away from a metropolitan city, it is likely to be eligible for the loan.
There is also an income restriction for USDA loan borrowers—you can’t earn more than 115% of the median income of your chosen area. There are online tools that will help you find out whether your income is within the eligible range based on the average income in your county.
To help low-to-moderate-income homebuyers apply for the loan, the credit score and DTI requirements for USDA loans are also low. Your minimum credit score must be 620 and your debt-to-income ratio might be as high as 50% (borrowers with less than 41% of DTI ratio may apply for better loan conditions). Another great benefit of this loan program is the possibility to make zero down payment. Although, you must have at least two years of stable employment to qualify for the loan.
Similar to the FHA loan, the USDA program requires you to pay the MIP or Mortgage Insurance Premium. However, it is usually cheaper than the one you pay for the FHA. It consists of 1% of your principal, which is the upfront fee, plus 0,35% of your monthly payments. You can pay the whole amount at closing or add it to your monthly payments.
The FHA loan, on the other hand, has no area restrictions. The DTI ratio requirements are a little stricter than those for the USDA loans. But your credit score can be as low as 500 if you are willing to put down at least 10% of the principal as your down payment. The minimum down payment is 3.5%, but you need at least 580 credit score to access this benefit, which is also fairly low.
Unlike the USDA loans, FHA loans don’t have any restrictions on your maximum income. The only thing they are going to check is your ability to repay your debt based on pay stubs and tax returns. You will also need to pay the MIP (usually about 1.75% of the principal payment every month). For those who make a down payment of 10% or more, there is an option to stop paying the MIP after 11 years.
As you can see, there’s a lot of factors that can influence your decision to choose the loan program that suits you. These factors include your income, credit score, ability to make a down payment, and the location of the property you want to buy.
We understand how confusing all of these might be for a first time homebuyer. Ebenezer Mortgage Solutions is always ready to help you and clarify any questions or queries you might have about mortgage loans.
So don’t hesitate to call us at (813) 284 – 4027 and have the most pleasant home buying experience!