FHA and USDA loans are both designed to make buying or refinancing a home more affordable. Because they are backed by the federal government, these loans feature competitive interest rates, flexible credit requirements, and lower down payments compared to most conventional loans.
There are differences between FHA and USDA loans. One important difference is that while you can use an FHA loan to buy a home in every county in the United States, you can use a USDA loan to buy a home only in rural and certain suburban communities. Read on to learn more about them!
What is an FHA loan?
FHA loans are backed by the Federal Housing Administration and offered by private lenders like Freedom Mortgage. They are designed to make buying or refinancing a home more affordable.
Benefits of an FHA Loan
- Low down payment. You can buy a home with a down payment as low as 3.5% using an FHA loan. You typically need a credit score of 580 or higher to qualify for this down payment, however.
- Low minimum credit score. Some lenders will approve your loan application with a credit score as low as 540. You usually need to make a 10% down payment when you have a lower credit score, however.
- Fixed rates available. An FHA loan offers fixed-rate mortgages. A fixed rate loan means your interest rate will stay the same throughout the life of the loan, which makes your monthly payments more predictable.
- Gift allowance. The FHA allows a family member to gift you all the money you need to make a down payment. Other loans may only allow a portion of the down payment to be a gift.
- Lower debt-to-income ratio. Lenders use your debt-to-income ratio (DTI) to help them decide if you qualify for a mortgage. Your DTI ratio can be as high as 43% with FHA loans.
Note that you will be required to pay an upfront mortgage premium, which is currently 1.75%. You will also pay annual mortgage insurance premiums, which typically run between 0.45% and 1.05% of the average annual scheduled unpaid principal balance. These mortgages also have limits on the amount of money you can borrow. Read more about FHA loan requirements.
What is a USDA Loan?
USDA loans are backed by the U.S. Department of Agriculture and offered by private lenders. Like FHA loans, they are designed to make buying or refinancing a home more affordable. To qualify, you need to meet income requirements and the home must be in one of the qualifying rural or suburban communities.
Benefits of a USDA Loan
- No down payment. Qualified homebuyers can buy a home without a down payment using a USDA loan.
- Lower mortgage insurance fees. The upfront mortgage insurance fee is 1% of the loan amount. The monthly mortgage insurance premiums are 0.35% of the average annual scheduled unpaid principal balance with USDA loans. These are lower than the fees for FHA loans.
- Lower credit requirements. Many lenders want a minimum credit score of 640 to approve a USDA loan. This is higher than the credit score for FHA loans but lower than the minimum for many conventional loans.
- High eligibility. Communities with populations of less than 35,000 people are usually eligible for USDA loans. Check out the USDA website to see if a home you want qualifies.
- Fixed rates available. Fixed-rates are also available for USDA loans.
FHA streamline refinances vs. USDA streamline refinances
Both FHA and USDA loans have a streamline refinance program which allows you to lower your rate with less paperwork and a faster closing. These programs have similar requirements. One important requirement is that you cannot change your loan type with a streamline refinance. You can only use the streamline program to replace an existing FHA loan with a new FHA loan or an existing USDA loan with a new USDA loan.
Both refinances have closings costs. With an FHA streamline refinance, you will need to pay a new upfront mortgage insurance premium equal to 1.75% of the loan amount. With a USDA streamline refinance, you will need to pay a new mortgage insurance fee equal to 1% of the loan amount.
For both types of refinances you will need to meet your lender's credit, income, and financial requirements to get your refinance approved.
Comparison of FHA vs USDA loan requirements
|Upfront mortgage insurance premium / fee||1% of loan amount||1.75% of loan|
|Annual mortgage insurance||0.35% of the average annual scheduled unpaid principal balance||Often between 0.45% and 1.05% of the average annual scheduled unpaid principal balance|
|Minimum down payment||0%||3.5% with a credit score of 580 or better|
|Only available for eligible property areas||Yes||No|
|Single-family homes only||Yes||Yes|
|Gift funds allowed||Yes||Yes|