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Choosing Between FHA, USDA Mortgages

Margaret Brennan

As a new homebuyer and owner, choosing the right type of mortgage loan can be difficult to decipher.

Deciding between FHA and USDA loans can be extremely difficult.

While both loans are designed for borrowers with low-to-moderate incomes, there are differences between them that can help in the decision-making process. 

Here’s a quick guide to understanding the two types of loans and the best scenarios for each. 

FHA Loans

Insured by the Federal Housing Agency, FHA loans are available to first-time homebuyers and those who haven’t owned a home for more than three years.

Offered by private lenders, these loans offer low down payments and closing costs. You don’t need a high credit score to qualify, with a minimum FICO score of 580 to qualify for a 3.5% down payment.

Any score below that will results in a 10% down payment. The eligbility requirements for an FHA loan include proof that you’re financially able to pay your mortgage and its insurance each month.

If you’re interested in living in a city, you should consider an FHA loan. USDA loans require that borrowers live in specific rural and suburban areas.

USDA Loans

USDA loans are backed by the Department of Agriculture and require no down payment.

Similar to FHA loans, they are offered to low-to-moderate income borrowers.

Another perk: mortgage lenders offer low interest rates for these loans. Your credit score needs to be a bit higher than that for an FHA, at 640 or better. And the house needs to be in an eligible rural or suburban area.

You can search for a prospective location or house address on the USDA’s eligibility page.

For reference, you can only qualify for a USDA loan if your income is no more than 115% of the area’s median income.

So, Which One?

As a new homeowner, your financial situation needs to be stable enough to pay a mortgage. These loan options offer an affordable route to buying a home. 

After you look past the numbers and logistics — such as your credit score and income — personal preferences should come into play.

Research where you want to live, and this should help decide which loan choice is best. 

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