The United States Department of Agriculture (USDA) and the Federal Housing Administration (FHA) offer excellent home loan options aimed towards first-time buyers, those with low-to-moderate income, or people living in rural areas.

Entering into a home loan is a significant commitment, and each loan program involves specific pros and cons depending upon your individual circumstances. So, it’s important to know the details of each plan to see if it could be the right fit for you.

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Conventional loans vs. USDA & FHA loans

Before buying your house, it’s important to consider all of the available home loan options, as some programs may offer you significant savings over a conventional home loan.

Conventional home loans are run by private mortgage lenders, which typically have strict credit rating and

down payment

requirements. While more difficult to obtain upfront, these loans can be cheaper over the long run.

To help homebuyers who want to move into a new home but may not meet all the requirements of a private lender, the USDA and FHA offer a unique, government-backed solution.

Rather than providing the loan themselves, the USDA and FHA will back your private lender if you default on your home loan. In USDA and FHA loans, you still take out money through a private lender but receive more lenient borrowing terms than a conventional loan.

USDA loans

The USDA program is geared towards home buyers living in rural areas. As such, your eligibility is largely based upon the location where you are looking to buy. To check if your new home qualifies, the USDA offers a

map

specifying the Rural Development areas eligible for this loan.

FHA loans

The FHA program offers the most lenient borrowing terms and qualifying requirements. This loan helps those who otherwise could not afford the requirements of a conventional loan to buy a home.

The downsides of this program are that it offers the least flexibility in terms of repayment and may cost you more in the long run.

Am I eligible for a USDA or FHA loan?

The USDA and FHA loan programs each have specific eligibility requirements that borrowers must meet. See the table below to check if your situation qualifies you for either of these loans:

Requirement	USDA	FHA
Location	Inside a Rural Development area	Any
Minimum credit score	640	500, with other options available
Down payment	0%	3.5% for credit scores above 580, 10% for scores 500-579
Mortgage length	30 years, fixed-rate	15 or 30 years fixed-rate or adjustable-rate
Mortgage limit	$285,000 for direct loans; none for guaranteed loans	$970,800, though it varies by location. Use this tool to find out the limit for your area
Household income limit	115% of the median local household income	None
DTI (debt-to-income) ratio	29% of monthly house costs to 41% of monthly debt payments	31% of monthly housing costs to 43% of monthly debt payments
Annual mortgage fee	0.35%	0.45-1.05% of the loan. If you have a 10% down payment, the fee can be canceled after 11 years
Upfront fee	1.0%	1.75%

Now we’ve seen the basic requirements for each loan—but what does that actually mean for you? Let’s take a look at the pros and cons of each loan.

The pros and cons of USDA loans

Pros

A USDA loan requires no down payment on your house. That means you can finance the entire cost of your home, which is a great option for those who are ready to buy but may not have enough money on hand for a traditional down payment.

You may put excess loan funds into the closing costs for the house if your loan appraisal is over the actual purchase price of your home. Here’s an example: you are approved for a USDA loan on a house for $150,000, but you manage to buy the house for $140,000. You may still get a loan for the full $150,000 and use the extra $10,000 to pay for things like the home title report and origination fees.

Additionally, USDA loans require smaller upfront and annual fees on their mortgage. This could mean significant savings for you both immediately and in the long run.

Cons

This loan is only offered to those in government-designated Rural Development areas. If you are not looking to buy in these areas, this loan will not be available to you.

USDA loans have stricter lending requirements than FHA loans. To qualify for a USDA loan, you must have a credit score above 640 and an annual household income of 115% or lower than the average in your surrounding area.

The pros and cons of FHA loans

Pros

FHA loans have more lenient requirements than USDA loans. As opposed to the USDA’s requirement of a 640 credit score, the FHA only requires a score of 500.

The FHA offers special options for those with no or very little credit history. In these circumstances, you may be able to show creditworthiness in other ways, such as a history of making rental payments on time.

There are no income limits, and higher debt-to-income ratios are accepted. This makes the program available to people at many different stages of life, including people who would otherwise qualify for a USDA loan but make more money than the program allows.

Cons

FHA loans are more expensive in the long run. The FHA program requires higher upfront fees to enter into the loan as well as higher annual fees over time.

You will be locked into these annual fees unless you make a down payment of 10% on your house. In that case, you will only be eligible to end the annual fees after year 11 of the loan.

How to save on home insurance

Regardless of what home loan option may be right for you, you won’t be able to finalize the loan without finding a

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How do I apply for a USDA or FHA loan?

To apply for a USDA or FHA loan, you’ll need to complete an online assessment detailing your financial situation. If you are interested in the USDA loan program,

click here

. If you think FHA is better for your situation,

click here

Which loan is better for me?

USDA loans have an income cap and are limited to areas designated as Rural Development areas by the federal government. FHA loans are available to more people, but may cost you more in the long run due to higher added fees.

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