First-Time Home Buyers: USDA vs FHA Mortgage?
When first time home buyers look for the best mortgages, different mortgage programs, come to mind. However, two of the most common mortgage loans they come across is the USDA mortgages and FHA mortgage loans, respectively.
There are several factors to consider when choosing home. Your budget and the amenities you want in the home are just two of the many. You also want a property in a safe neighborhood. Once the decision of the property you want has been made, the next most important decision is how to finance the purchase.
Most first time home buyers are usually stuck between two options – the USDA mortgage loan and the FHA home mortgage. While both programs share a common feature of small down payments, there are some differences between them. Below is a brief analysis of both loans to allow persons in search of the right Texas home mortgages to make a choice.
USDA or FHA – Which one should a First-time home buyer choose?
The USDA loan granted by the U.S. Department of Agriculture is increasing in popularity especially among first time home buyers, and the reason is not far-fetched. This loan program is entirely different from the traditional mortgages in a variety of ways. Below are some of the features of USDA that makes it a somewhat better option compared to FHA.
1. Zero-down financing
This is one of the most attractive features of USDA loans. It allows borrowers to finance as much as 100 percent of the value of the home which can sometimes be above the price of the home. This also allows buyers to finance closing costs.
Consumers are allowed to open a loan for the full value of the property. However, the excess fund must be applied to closing costs like loan origination fees and title report. Excess funds can also be used for prepaying property taxes and homeowner’s insurance.
USDA loans allow home buyers to walk into their homes even without paying anything from their bank account.
The case is a bit different with FHA, as customers are required to make a down payment of 3.5 percent in addition to closing costs. FHA has no guideline that mainly states that the loan amount can be more than the purchase price. The only way of getting a zero out-of-pocket loan is by getting a down payment gift, in addition to seller contributions or gift funds for closing costs.
2. Rural local requirement for USDA
A borrower’s eligibility for USDA loans depends on where the home is located. It is required that the property is located in a rural area based on the definition of the USDA. However, it is worth noting that the definition of rural in this situation is liberal. Consequently, many suburban areas qualify as rural zones of the definition of USDA.
Interested first time home buyers can head to the website of the USDA for online maps showing the different eligible areas. Studies have shown that more than 90 percent of the American landscape fall under the category of rural areas based on USDA’s definition.
Some buyers, however, find these eligible areas too far from employment centers. They are therefore forced to opt for an FHA loan that has no geographical restrictions.
3. USDA income limits
The USDA loan was created in a bid to facilitate homeownership in rural areas and subsequently boost economic activities. Therefore, there are income limits published by the USDA. The maximum is set at 115 percent of the median income for the area. In most cases, this amounts to no limits.
Persons that do not fall within the income limits set by the USDA usually have to settle for FHA loans.
4. The “owner-occupied” rule
One of the similarities of the FHA and USDA loans is that borrowers cannot currently own another property within a reasonable distance of the house being bought. It is also required for the borrower to have plans of living in the home he or she intends to purchase. USDA and FHA loans are not for rental or investment housing. Real estate investors are therefore not eligible for both loans.
The FHA and USDA loans are two of America’s most popular loans especially when it comes to government-backed mortgages. However, first time home buyers usually have to drop one or the other due to some of the reasons mentioned earlier.
Remember that the decision to buy a home is a big one that should be taken with utmost caution.