Why do some borrowers choose FHA home loans instead of the no-money-down USDA home loan? There are several reasons why an FHA mortgage might be the better choice depending on circumstances.
USDA Mortgages Versus FHA Home Loans: Down Payment Requirements
USDA loans do offer an advantage to eligible borrowers with a zero down payment requirement. USDA loan rules state that in some cases, borrowers who have assets higher than the USDA limit “…may be required to use a portion of those assets”.
FHA home loans require a minimum down payment of 3.5% of the adjusted value of the home. The down payment requirement may be higher if there are other factors to consider including a non-occupying co-borrower (depending on circumstances), FICO scores that are lower than the limit for maximum financing, etc.
USDA Loans Versus FHA Home Loans: Financial Need
When comparing home loan options, potential home owners learn that the USDA Single Family Housing Direct Home Loan program is a need-based home loan intended for “…low- and very-low-income applicants” to help them get “decent, safe and sanitary housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability” according to the USDA official site.
By comparison, the FHA Single-Family Home Loan program is not a need-based home loan. It approves loan applications based on the borrower’s financial qualifications-FICO scores, loan repayment history, etc. There is no maximum income limit for an FHA mortgage.
USDA Mortgages Versus FHA Home Loans: Location Requirements
FHA mortgages have no general restrictions on where a home may be located; the exceptions are that certain flood zones or other known natural disaster areas that are identified as “no approval” zones.
Even with those limits, borrowers may still be able to get a home loan in certain areas known for past natural disaster activity if there is available insurance and the location and home meets other FHA requirements. But overall, FHA loan rules for the Single Family Home Loan program do not state that a home must be in a rural area or a city of a certain size.
USDA single-family home loans, on the other hand, do have restrictions on where the home may be located. USDA loans are generally for those living in rural areas. In some cases the USDA home loan may restrict the size of the residence and other requirements may also apply.
Ask your loan officer about FHA home loans and how they can help you purchase a home or refinance an existing mortgage.