Wanting to buy a home but afraid you won’t qualify for a mortgage because of student loan debt, poor credit or a dismal savings account?
While you might not qualify for a more conventional mortgage, you'll be happy to know you may qualify for a couple of popular government-backed loan options – the FHA Home loan and the USDA Rural Development loan. Created to help low- and middle-income earners achieve homeownership, you don’t need a high paying job, a lot of money in the bank, or the best credit to qualify. It is important, however, that you show you have a reliable income and a steady job, especially one you've been working at for the last two years.
Both loans have pros and cons so it’s important to examine each loan carefully to determine which loan could work better for you. Let’s take a look at their down payment requirements, income limitations, mortgage insurance and location specifications.
Down payment requirements
With the FHA loan, you only need 3.5% of the purchase price for the down payment. For example, that’s $3,500 for a $100,000 loan. And, if you’re struggling to scrape the $3,500 together, FHA allows your down payment to be a gift from your parents or another relative.
USDA Rural Development loans require no down payment. That’s right. You can finance up to 100% of the property value, which, in some cases, can be above the home’s purchase price. In these cases, you can finance your closing costs as well. For example, let’s say you make an offer on a $125,000 home and the lender’s official appraisal report states the home is worth $130,000. In this situation, you can take out a loan for the full value, as long as you apply the excess funds to your closing cost expenses. Closing costs can run several thousands of dollars and typically cover expenses such as the title search, title insurance, taxes, and homeowner’s insurance.
Also, keep in mind that with both FHA and Rural Development, you can negotiate with the seller to pay a portion of your closing costs: up to 6% for both loan options.
TAKEAWAY: If you have little cash on hand, the Rural Development loan offers more flexibility.
Income guidelines
The Rural Development loan was created to help individuals with a modest income buy a home. In order to satisfy this goal, the USDA requires that lenders certify the applicant’s household income to ensure it does not exceed the income limit for their area.
USDA Rural Development loan income limits vary by location and household size. For many U.S. counties, USDA loan income limits are $90,300 for 1-4 household members and $119,200 for 5 or more (2021). If you live in a high-cost county, you’ll have a higher income limit than if you live in a county with an average cost of living.
Examples of maximum USDA Annual Income Limits across the country (2021):
|
City |
1-4 Member Household |
5-8 Member Household |
|
Kalamazoo, MI |
$90,850 |
$119,900 |
|
Cincinnati, OH |
$90,300 or $99,250* |
$119,200 or $131,000* |
|
San Diego, CA |
$136,500 |
$180,200 |
|
Gainesville, FL |
$90,300 |
$119,200 |
|
Elizabethtown, KY |
$90,300 |
$119,200 |
*depending upon geographical area.
With FHA, there are no income limits for its standard program.
TAKEAWAY: If your income is above the USDA Rural Development income limits, you’ll need to go with the FHA loan.
Mortgage insurance
In exchange for flexible lending requirements offered by both the FHA and USDA Rural Development loans, you’re required to pay funding/guarantee fees which are a form of upfront, financed mortgage insurance. In addition, you’ll be required to pay a monthly fee which is rolled up into your mortgage payment.
As you will see, mortgage insurance is considerably higher for the FHA loan as compared to the Rural Development loan:
FHA upfront insurance is 1.75% of the total loan; the monthly insurance is usually 0.85% of the loan amount.
USDA upfront insurance is 1.0% of the total loan; the monthly insurance is just 0.35%.
If you're borrowing $150,000, this is what you can expect to pay:
|
Loan |
FHA* |
USDA** |
|
Upfront Fee |
$2,625 |
$1,500 |
|
Monthly Fee |
$106.25 |
$43.75 |
|
You’ll owe this amount as part of monthly mortgage payment |
$228 |
$129 |
*FHA assumes 30-year fixed loan, down payment of $5,441, 3.5% interest rate, 4.335% APR
**USDA assumes 30-year fixed loan, zero down payment, 3.5% interest rate, 3.850% APR
TAKEAWAY: As you can see, the USDA loan is the winner here.
While mortgage insurance adds to your monthly payment, it’s also the mechanism that enables you to become a homeowner if you don’t have 20% to put down on a home. If you’re like many homeowners, you can afford the monthly insurance premium; it’s coming up with the down payment that can be the real challenge.
Location
Because the Rural Development loan was created to increase homeownership in less populated areas, it requires you to buy a home within designated geographical areas. What you may not realize, however, is that properties in almost every area of the country outside major metropolitan centers can be purchased with a USDA loan. In fact, an estimated 97% of the American landscape is geographically eligible for a USDA loan.
Check here for USDA Rural Development Eligibility (then click "Single Family Housing" under "Property Eligibility").
FHA loans have no limitations on property location, so you can buy your home anywhere you like.
TAKEAWAY: If you’ve got your heart set on living within a stone’s throw of a bustling urban core, the FHA loan is your go-to loan; If you prefer a suburban or rural setting, and you’re within the income limits, go with the Rural Development loan.
FHA loan vs USDA RD loan
It’s not always easy to choose the best loan to suit your needs. However, the more informed you are, the easier it is to narrow down your choices. Check out our comparison sheet for a more detailed side-by-side look at the FHA and USDA Rural Development options. And, keep in mind that our friendly loan officers are always happy to chat with you about your options and review your financial situation with you. When you're ready to talk, let us know.
