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Comparing USDA and FHA Home Loans

For many low- and middle-income earners, the USDA loan and the FHA loan are the best mortgage options out there. Offering a low barrier to entry, affordable closing costs and looser credit and income requirements than other loan programs, they’re some of the most popular mortgage options in the country.

But what’s the difference between a USDA loan and FHA loan? Which is the right choice to go with? That depends on the buyer’s financial situation and long-term goals.

But when you stack them side by side, USDA loans tend to provide more advantages than FHA loans. Let’s take a closer look.

Down Payment Requirements

USDA loans offer 100 percent financing, meaning there is no down payment required. FHA loans, on the other hand, require at least 3.5 percent down. Though this is less than conventional loans often require, it does mean the buyer must put down a lump sum of cash up front.

For example, on a $300,000 home, the minimum down payment on an FHA loan would be $10,500.

USDA vs. FHA Mortgage Insurance Costs

Both USDA and FHA loans require upfront and annual mortgage insurance premiums, though USDA’s premiums are slightly more affordable. Upfront mortgage insurance is 1 percent on USDA loans and 1.75 percent on FHA loans. Borrowers typically finance these fees into their loan rather than pay them in cash.

For USDA loans, the annual mortgage insurance charge is 0.35 percent of the loan balance. For FHA borrowers, that fee is 0.85 percent. Borrowers in both cases pay these annual fees for the life of their loans.

Home Location Requirements

Because USDA loans are designed to spur development in rural areas, they are one of the few mortgage programs that require its borrowers to purchase property in a specified geographic area. The good news is most of the country is considered eligible outside of urban areas.

FHA loans have no limitations on property location, and borrowers can purchase their home anywhere they choose.

Like all government-backed home loans, both FHA and USDA loans require borrowers to purchase homes that will be used as a primary residence.

Credit and Income Requirements

Credit and underwriting requirements for FHA and USDA loans vary by both loan type and by lender.

USDA loans typically require a credit score of 640. Some FHA lenders may be willing to work with credit scores as low as 580. Lenders will often have their own policies and guidelines for derogatory credit issues like bankruptcies, foreclosures, short sales, collections, judgments and more.

There are no income minimums for either loan type, but USDA loans do have maximum income guidelines to help ensure these loans go to low- and moderate-income borrowers. Income limits can vary by location, family size and other factors.

Loan and Income Limits

There are both income and loan limits to consider when choosing between USDA or FHA loans.

Because USDA loans are intended for low- and middle-income earners who don’t qualify for most other mortgage options, there are strict income maximums for USDA borrowers. These vary by location but are set at 115 percent of the county’s median income.

FHA loans have no income maximum.

Though both loan programs are designed to cover modestly priced housing, there are no outright limits on USDA loan size. As long as the buyer has appropriate debt-to-income ratios and meets other requirements, they are eligible. FHA loan limits depend on location and are generally 115 percent of a county’s median home price.

FHA vs. USDA: An Example Scenario

To truly compare FHA and USDA loans, it’s important to look at a real-life scenario. Let’s compare how a 30-year $250,000 mortgage with an interest rate of 4.5 percent would look under each loan program.

In this example, we will estimate property taxes and homeowner’s insurance at $260 per month.

Minimum down payment:

  • FHA - $7,000
  • USDA - $0

Funding fee:

  • FHA - $4,222
  • USDA - $2,500

Principal & Interest Payment:

  • FHA - $1,244
  • USDA - $1,279

Mortgage Insurance:

  • FHA: $174
  • USDA: $74

Monthly Payment:

  • FHA - $1,678
  • USDA - $1,613

Is an FHA loan the same as a USDA loan? As you can see, in terms of cost, there’s definitely a difference -- both up front and over time. The extra costs of FHA’s mortgage insurance can add up significantly over a 15- or 30-year mortgage.

For buyers looking to purchase a property in one of the USDA’s approved areas, the USDA loan is often the more affordable option.

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