Would you rather buy a home in a limited, specific area in order to have no down payment, or have the freedom to buy where you want and pay a small down payment to finance it? When it comes to comparing USDA Rural Development to an FHA loan, that's a vital question you'll have to answer. What else are the differences between an RD loan and FHA? Let's take a look.
What is a Rural Development Loan?
First, let's take a look at what USDA rural development is. In our recent article, we cover the nuts and bolts of this mortgage loan option. Here's an excerpt:
You can finance the right home with a 100% financing mortgage loan option. Keep in mind of course, you will still need cash for pre-paid items like taxes and homeowners insurance (which gets put into an escrow account).
There are specific rules when it comes to a USDA Rural Development mortgage. The house must meet the geographical requirements. The house must be located in an area the USDA considers "rural." This doesn't mean your new home will be miles away from your closest neighbor. This isn't "Little House on the Prairie." In fact, many neighborhoods fall in the rural designation. Check here for USDA Rural Development Eligibility (on this page click "Single Family Housing" under "Property Eligibility").
So as you can see, you get to buy a house in a specific area with 100% financing on the mortgage. Not a bad deal.
What is an FHA Loan?
On the other side of this coin is an FHA loan. Let's explore that option a little.
FHA mortgage loans are home loans backed by the Federal Housing Administration through mortgage insurance. You pay 3.5% of the purchase price of the home with your own cash (or a gift) as the down payment. The other 96.5% of the price is covered by your mortgage. FHA loans also come with monthly mortgage insurance. However, these premiums are often lower than other mortgage loans, so they're often popular with first time home buyers.
FHA Loan vs USDA RD Loan
How do you compare 2 low-to-no down payment home loan options? Each option has pros and cons, depending on your particular situation.
- No down payment: RD
- Low down payment: FHA loan
- Location freedom: FHA loan
- Geographical requirement: RD
- Remodeling financing option: FHA loan (flip it to an FHA 203k loan)
- Income limitation: RD
- Home price limitation: FHA loan
Based on the short list above, making the decision can be tricky when choosing between the USDA Rural Development loan and an FHA mortgage loan. However, armed with more information, you might get some focus on your decision. Download the comparison sheet below for a more detailed side-by-side look at these to home loan options. The best bet to compare your options is to talk to a mortgage consultant. When you're ready for that, let us know.