The question always arises when it all comes down to choosing which government program would be better – USDA or FHA. This information should give buyers a general idea of the basic pros and cons. Note that all the information has been verified as up-to-date.
| Criteria | Loan Type | |
| FHA | USDA | |
| 1. Down Payment | 3.5% | 0% |
| 2. PMI | .55% | .35% |
| 3. Funding Fee * | 1.75% | 1.0% |
| 4. Limits (loan) | YES | None |
| 5. Limits (income) | None | YES |
| 6. Restricted location | None | YES |
| 7. Credit score | 580 | 620 |
* FHA monthly PMI rate is based on min 3.5% down. This rate does decrease with a greater down payment.
Basically, the USDA program will allow for NO down payment. Additionally, the one-time fee and monthly PMI fees are cheaper when compared to FHA. However, USDA comes with a few requirements related to property location and income eligibility.
Essentially, the only issues that could be considered as drawbacks of the USDA are the restriction of location and the income limits. The location must be in a designated rural area with a total population within the Rural Development limit. This can be an obstacle for buyers that don’t want to drive farther to get to work in the city. In fact, some even opt for the FHA loan as they believe the transportation costs incurred in the loan’s term under a USDA mortgage will amount to the same, if not more than the FHA’s mortgage.
Additionally, the USDA’s income limit imposed on would-be borrowers is currently set at 115% of the median or average income of the area where your home is to be situated. That means for those buyers with a higher income than the average would have to opt for an FHA, VA or Conventional mortgage.
There are a few other points that put the USDA at an advantage over the FHA mortgage program, such as the appraisal value. USDA appraisal value is normally higher than the selling price. If the appraisal value is more than the purchase price, this becomes an additional advantage for borrowers, as the USDA will permit you to raise the purchase price and keep a portion of the “excess” for minor repairs or to help pay closing costs. This helps further reduce the borrowers out-of-pocket costs.
Lastly, all USDA guaranteed loans have a 30-year fixed rate term. This can be very advantageous mainly when the homeowner eventually starts earning more than the required 115% median, the rate is fixed and even after 10 years only, will practically be insignificant compared to other monthly expenses at this time.
As for interest rates and loan qualifying guidelines, the FHA and USDA are just about equally matched. However, the USDA, unlike the FHA, allows borrowers to finance the whole purchase price and include any closing expenses as well into the loan.
*Note: the Funding Fee or “Guarantee Fee” on both programs are incorporated into the overall loan.
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