Mondays are numbers days here at this blog, and loans involve numbers. Lots of numbers. Here we are in lender-land!
Mike Coble held a lunchtime class for REALTORS® last week, and the topic was the financial differences between FHA home loans and USDA home loans. My two simplest take-aways were:
- If you have a high enough credit score and a substantial down-payment, a conventional loan is your best bet, unless you don’t plan to keep the house for very long.
- A USDA loan is cheaper in total than an FHA loan, and is a better deal, if you and the property qualify.
FHA loans are insured loans from a Federal Housing Administration-approved lender. In other words, it is not a loan from the FHA, but one insured by the FHA. Your down payment can be quite low, and your credit score can be on the lowish side- 620 and up.
The USDA loans for low-income buyers are loans through the United States Department of Agriculture Rural Development Guaranteed Housing Loan Program. All USDA loan types are restricted by area, being intended to keep rural areas developed and inhabited, so you must check to see if a property is eligible for this loan type. USDA also insures loans through approved private lenders much like the FHA does. Your credit score needs to be 640 and up, but you can put no money down at all to get the loan. A third type of USDA loan is for home improvement.
The FHA loan is restricted in amount. For example, in Hays and Travis Counties, the largest base loan amount you can borrow is $361,100, and in Blanco County, it is $275,665. The USDA loan amount is not restricted.
On the other hand, the USDA loan is restricted by family income. For example, a family of one to four members can get a USDA loan in Hays County if the annual family income is $89,500 or less. In Blanco County, the same family is eligible if its annual income is $80,950 or less. The FHA loan has no income limits.
With a conventional loan, the lender requires the buyer to pay for private mortgage insurance against the day the borrower defaults, but that mortgage insurance payment goes away when the borrower has paid down the loan a certain amount. An FHA loan requires an upfront mortgage insurance premium, which can be rolled into the loan amount, and it also requires a monthly mortgage insurance premium payment. The circumstances under which this insurance is no longer required are restricted, so those payments will probably stick with you like a bur. The USDA loan has a one-time payment called a ‘funding fee’, which can be rolled into the loan. In other words, if you are getting a $300,000 USDA loan, a 1% funding fee will make your loan amount $303,000.
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