The difference between USDA and FHA loans

USDA vs. FHA Loans: What’s the Difference?

USDA and FHA loans are both government guaranteed loans, which means that instead of being purchased by Fannie Mae or Freddie Mac, your mortgage will be guaranteed by a government entity. The similarities between them, however, end there for the most part.

A USDA loan is a loan guaranteed by the United States Department of Agriculture (USDA). These loans are intended to help low to middle income people in rural areas access home ownership at an affordable cost. Because the USDA backs these loans, homebuyers can get lower interest rates and more favorable loan terms than they might get with a conventional mortgage.

An FHA loan is a loan guaranteed by the Federal Housing Administration (FHA). These loans are for aspiring low to median income homebuyers looking for an affordable loan for a primary residence. Although you don’t have to be a first-time home buyer to qualify, FHA loans are a popular choice with first-time home buyers.

Eligibility

To qualify for a USDA loan, most lenders require you to have a credit score of at least 640, although this number can vary. Since USDA loans are intended for low-income borrowers, there are income requirements: your adjusted gross income cannot exceed 115% of the median income in your area.

Beyond that, you must also live in an area eligible for a USDA loan in the first place. Only areas considered “rural” will be eligible. You can check if your area is eligible by visiting the USDA website.

To qualify for an FHA loan, you generally need a credit score of at least 580. Some lenders will allow a score of 500 with a down payment of at least 10%. There are no income requirements for an FHA loan, but you will need to prove that you have a stable source of income by providing W-2s, payslips, etc.

Approval process

To be approved for a USDA loan, you will need to provide all the usual documents to get a loan, such as your credit score, proof of income, monthly debts, etc. Before you can close, you will also need to get an appraisal to certify that your home is located in a USDA eligible area, is habitable, connected to roads, and is being sold for fair market value.

When approving a USDA loan, keep in mind that the process of obtaining your loan may take longer than obtaining an FHA loan. USDA loans are underwritten twice, once by your lender and then again by the USDA. Depending on the level of your credit score, your loan may go through manual or automatic underwriting. Manual subscription may take longer.

You can expect your loan to close in 30-45 days, typically. When you borrow your mortgage, the USDA 2022 loan limit in most areas is $336,500. However, this amount can vary by county, and in high-cost areas the limit can be as high as $970,800.

To be approved for an FHA loan, you will also need to provide your income, credit score, etc. As with a USDA loan, you will also need to get an appraisal. With an FHA loan, however, you will need a specialized appraisal known as an FHA appraisal. The purpose of this examination of your home is not only to determine the value of the home, but also to ensure that the home meets the health and safety standards of the United States Department of Housing and Urban Development (HUD) .

You can also expect your FHA loan to close in about 30-45 days, although it may take less time depending on your situation. As for how much you can borrow, the lowest FHA loan limit may be 65% of the national compliant loan limit. For 2022, it’s $420,680.

In high cost areas, however, the loan limit can be as high as $970,800. Lending limits vary from county to county, so in many areas the limit may be somewhere between these two numbers.

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