What’s better? The FHA or USDA mortgage program?

Peter Miller
The Mortgage Reports contributor

FHA vs USDA: Which one is right for you?

FHA or USDA mortgages, which should you choose? It’s not an easy question and there’s no single answer which is right for everyone. But – that said – it’s a question which many borrowers should ask because the right answer can mean big mortgage savings.

The FHA and the US Department of Agriculture (USDA) both provide backing for qualified mortgage borrowers. These programs allow the purchase of real estate with little or nothing down. If you don’t have 20% down these are mortgage options to carefully consider.

Shop rates with today's top lenders. (Jul 5th, 2020)

FHA vs USDA: Down payments

USDA wins this one. It requires zero down payment while FHA requires 3.5% down.

FHA buyers with a credit score below 580 will need 10% down.

Lenders usually want 20% down. But with FHA and USDA participation they’re willing to take much less. How come? Because they accept government backing as a substitute for a big down-payment. The government will pay the lender back for any losses if the borrower defaults on the mortgage.

FHA and USDA credit score minimums

The rules say you can qualify for FHA financing with a credit score of as little as 500. Good luck. In practice, most lenders will decline such applications. The average FHA borrower financed with a credit score of 670 according to a recent FHA report.

That being said, FHA wins this battle. Most lenders will accept a lower minimum score for FHA borrowers than for USDA. It’s not uncommon for lenders to accept credit scores down to 600 or even 580 for FHA.

USDA (technically) imposes no minimum credit score. However, the USDA has a computerized underwriting system which will approve borrowers with scores of 640 and above. This is where most lenders set their minimum.

Interest rates, FHA insurance and USDA guarantees

USDA claims this victory.

Both programs are insured by the government, but lenders view USDA loan backing as stronger.

As a result, USDA mortgage rates are often lower than those of FHA.

As with any loan program, you get better rates when you shop around and compare lender offers.

FHA and USDA mortgage insurance

USDA takes this title.

Both programs require monthly premium payments from borrowers for mortgage insurance. But the amount is not the same.

The USDA program borrowers must pay a 1% upfront fee whether they are buying or refinancing a property. In addition, there is a 0.35% annual fee, or

For FHA loans, most borrowers will pay a 1.75% up-front mortgage insurance premium (up-front MIP) as well as a .85% annual mortgage insurance premium (annual MIP).

Loan Type Upfront MI Monthly MI Monthly cost per $100k
FHA 1.75% 0.85% $71
USDA 1.0% 0.35% $29

FHA vs. USDA Costs

Winner: USDA

The cost differences between FHA and USDA financing are significant. Let’s see how they compare in rough terms with a property that sells for $175,000.

Down payment

  • USDA (0.00%) = $0.00
  • FHA (3.5%) = $6,125

Up-front fee (This fee can be added to the loan amount so borrowers do not need to pay this fee in cash.)

  • USDA up-front guarantee fee (1%) = $1,750
  • FHA upfront MIP (1.75%) = $3,062

Mortgage insurance cost (paid monthly)

  • USDA = $52
  • FHA = $120

Based on costs the USDA plan is less expensive in terms of down payments and fees. However, the FHA plan is more widely available.

Loan limits versus income limits

FHA wins.

There are limitations for both the FHA and USDA mortgage programs.

With the FHA, how much you can borrow depends on the size of the property – one unit, two units, three units and four units – and where it’s located. For example, at this writing the one-unit FHA loan limit is $314,827 in Lafayette, LA, $561,200 in Denver, and $726,525 in San Francisco. With more units the FHA maximum loan size goes up.

In practice, the FHA loan limit is sufficient to provide financing in most jurisdictions and for most properties. In February 2019, according to the National Association of Realtors, the typical existing home sold for $249,500.

While USDA has no loan limits, it does have income limits which are much more restrictive.

To be eligible, you must make no more than 115% of the area’s median income. For example, the maximum amount you can make with a 1-4 person household is as follows:

  • Seattle, Washington: $125,950
  • Auburn, Alabama: $82,700
  • Sacramento, California: $92,150

Depending on where you live and your income, you may not be eligible for the USDA program at all.

Geographic limits

Winner: FHA

At first the geographic requirement may seem like a high bar. Do you need to live in a small town? The way the government defines rural and suburban areas means that most US communities actually qualify for USDA financing. The federal list of USDA-qualified areas runs more than 475 pages.

However, the FHA loan has no geographic limits whatsoever. You can buy a home in a downtown core as easily as in a small town.

Which one should you choose?

So which is better, FHA financing or a USDA mortgage? There’s no sure answer, but speak with lenders to discuss program details and which option would work best for you.

Check your FHA and USDA eligibility here. (Jul 5th, 2020)