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USDA loans are intended for purchasing a home in agency-defined rural areas. FHA home loans feature no such restrictions on where you may purchase the home, though there are typical considerations for certain natural disaster zones, coastal barrier resource system or protected areas.

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FHA and USDA Home Loan Comparison - Part Two

July 10, 2021

FHA and USDA Home Loan Comparison - Part Two
In a previous article, we began discussing the differences between FHA and USDA home loans. These two programs are intended to help people get into affordable homes with more flexible credit guidelines than some conventional mortgages.

But FHA mortgages and USDA loans are not interchangeable. FHA mortgages have no income limits, purchase limits, and no restrictions on where you may buy.

Purchase Limits

FHA loans can be used in the city, in rural areas, and anywhere else a single-family house might reasonably be located. USDA loans are for properties in rural areas and those who wish to purchase a home in a large city will find a VA, conventional, or FHA loan instead of a USDA mortgage.

You read that correctly--USDA loans are not for just any property but rather intended for purchase in agency-defined rural areas. FHA home loans feature no such restrictions on where you may purchase the home, though there are typical considerations for certain natural disaster zones, coastal barrier resource system or protected areas.

No Money Down Loans

USDA mortgages provide a zero-down option. There is also a 90% financing option for certain borrowers. While FHA mortgages do not allow a no money down home loan option the borrower is permitted to use approved down payment assistance, mortgage credit certificates, and other assistance.

FHA borrowers are permitted under FHA loan rules to negotiate with the seller--you can ask the seller to pay up to six percent of the borrower’s closing costs. The seller may NOT assist with the down payment.

Participating Lenders

Not all financial institutions offer FHA and USDA loans--they are only available through participating lenders, and there are many.
 
Both programs feature minimum FICO score requirements (subject to additional lender standards) and both FHA and USDA mortgages require mortgage insurance.

If you aren’t sure which type of home loan is right for you, discuss your home loan needs and goals with a participating lender. Remember that FHA loan options include the ability to use down payment help from a qualifying agency, a family member, etc. All such help must be sourced according to lender standards so it’s smart to ask early.

When talking to the lender, be sure to ask about minimum FICO score requirements, income caps and purchase price restrictions on USDA mortgages, and what your refinance options are like with both programs.

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Step 9: What to Expect at Closing

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