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The USDA Loan vs The FHA Loan, Will The Really Winner Please Stand Up?

By Paul Dunn

Education & Training

January 21, 2011 05:20 AM

Which Is The Better Loan, The USDA Loan or The FHA Loan?

USDA-Loan-vs-FHA-Loan Well I do quite a bit of both and for the majority of people the USDA loan will be a much better financial move for buyers in Arizona, and here’s why.

FHA has a down payment requirement, and it is currently at 3.5% of the purchase price. The USDA Loan does not require any sort of down payment at all. So right there, you get to keep that 3.5% down payment in your bank account; that is if you even have it in the first place, right?

FHA also requires a monthly mortgage insurance payment. That amount that FHA requires is 0.9 percent of the loan amount. That will give you the annual payment, so just divide it by 12 for the monthly amount.

So if you have a $200,000 loan amount then the monthly FHA Mortgage Insurance would be just over $150.

FHA will determine the loan amount based off of the lower of the sales price or the appraised value. And the USDA Loan will let you base the loan amount off of 103.5 percent of the appraised value. They do this because they really don’t want to see a borrower come to closing with cash, so you can usually roll all your closing costs into the loan.

And still have a lower payment than the FHA loan.

So, if you qualify for a USDA Loan AND the property is in a USDA eligible area, then the USDA Loan will always be the most cost effective loan available.

One last thing in the old FHA versus USDA question… The USDA Loan has much simpler, easier underwriting than FHA; which makes it easier to qualify for.

I hope you found this Arizona Home Loan tip useful and would love to hear your comments.

To find out if you qualify for a USDA Loan call (520) 225-0380 or click on the Get Started on USDA tab over at USDARuralHomeLoans.com and ask for a quote. If you want to go ahead and get your application in, you can fill out my Arizona Home Loan Application Online here.

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Robert Rauf

CMG Home Loans - Toms River, NJ

I agree! USDA is the better option if the buyer and the property fit into the mold! Even in NJ we have quite a bit of USDA eligible areas.

Jan 24, 2011 08:52 AM

Greg Miller

Ruoff Home Mortgage - Sarasota, FL

Florida Home Loans - Conventional,FHA,USDA,VA

Paul, As of Oct.10 the FHA Mortgage Insurance Premium was raised from .55% to .90% for down pymts. less than 5%. Also in most every instance a borrower is going to get a little better interest rate on a FHA loan vs. USDA. The USDA 3 1/2 % is a one time norefundable fee. So while I agree in a lot of instances a USDA may be the better option, there are still many times that it would not. In my humble opinion.

Jan 25, 2011 12:36 PM

Paul Dunn

Tucson, AZ

former orginator

@ Robert - Thanks! Because it is the cheapest and easiest way to buy a home in Arizona, it has become tremendously popular here.

@ Greg - Thanks for pointing out my error with missing the FHA price increase on the MI from 0.55 to 0.9. Old habbits are hard to break.

I do understand that at some mortgage companies the FHA rate might be slightly lower. But it would have to be approximately 0.625 or more lower in order to get lower payments, even with the 6.2% difference in loan balance. My FHA and USDA rates are exactly the same. So on the purchase of a 150,000 home that qualifies for USDA the monthly payment would be approximately $60.36 lower than an FHA payment and the borrower would still have $5,250 in their bank account, plus the refund of their earnest money deposit which could be another $1,000 or so.

I wrote a detailed post comparing FHA and USDA costs over a 5 year period, and USDA was cheaper in 4 out of 5 categories. You can find it here USDA vs FHA.

Don't get me wrong, I love the FHA and it has been good to me. But if my buyer can get in, the USDA has always been the cheapest and easiest way for my buyers who have limited income and limited assets.

There are some lenders that actually stop funding when the USDA runs out of funds, we do not. Some also wait until they actually get the guarantee from the local RD office which can add significant time to the closing.

Jan 26, 2011 05:10 AM

@ Greg - Hey I had 2 loans come in today that both qualify for USDA but the FHA is a better choice for them. you were right that sometimes the FHA is a better choice. In their case it is because they get housing assistance payments and regardless of the loan type, their payments would be the same. But the FHA loan amount would be lower!

Jan 27, 2011 06:49 AM

The USDA Loan vs The FHA Loan, Will The Really Winner Please Stand Up?

Which Is The Better Loan, The USDA Loan or The FHA Loan?

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