Different loan programs target different buyers. A mortgage application assesses many aspects of your financial situation, such as your debt-to-income ratio, credit score, household income, and your own loan preferences. It is always recommended to stay informed on the types of loans available to you. Two popular loan types are FHA loans and USDA loans, both directed at low income households.
An FHA loan is a type of loan insured in part by the Federal Housing Administration (FHA). FHA loans are very popular among first time home buyers, with low down payments (3.5%) and a minimum recommended credit score of 580 (If your score is lower than 580, your down payment may increase).
The FHA offers four types of loans:
- Mortgage Loans: This is ideal for low income-earners, as the loans offer low-to-no closing costs, a minimum down payment of 3.5%, and a great degree of credit score leniency.
- Reverse Mortgage: This loan program is offered for senior citizens (62+). Also known as the Home Equity Conversion Mortgage (HECM), this program allows qualifying applicants to convert part of their home’s equity into additional income.
- Energy Efficient Mortgage Program: This program is targeted to families on a budget. It is a special program that borrowers can participate in, even while holding an FHA-insured mortgage. Borrowers draft an efficient energy plan for their house, which is then tested with the Home Energy Assessment. If approved, the energy plan will be financed, allowing the borrower to move forward with upgrading their home’s energy system.
- Manufactured Housing and Mobile Homes: This loan type provides assistance for landowners and mobile home owners in building or purchasing factory-built and mobile homes.
FHA loans are also eligible for streamline refinances. Plus, these loans are not limited to a 43% debt to income ratio. FHA loans also allow non-occupant co-applicants to take part in a borrower’s mortgage. Additionally, FHA loans are not restricted to geographic areas, though they do have different loan limits depending on the median income of an area. FHA only offers insured loans, and does not act as a guarantor.
On the other hand, USDA loans are loans are offered by the United States Department of Agriculture (USDA). FHA and USDA loans are similar in that they are both intended to help low-income earners, but these two programs differ wildly in their requirements for eligibility. USDA loans are available to eligible rural and suburban homebuyers with low to moderate incomes. Check the income and property eligibility criteria to see if you qualify for USDA Loans. These loans tend to have a life of up to 38 years. If an applicant’s total income, including income earned by a spouse and and children above 18, exceeds the USDA maximum, then they are not eligible for a USDA Loan. USDA eligible properties are defined as “open country,” or areas with populations of less than 10,000 people (or 20,000 in areas with a lack of mortgage credit).
There are two types of USDA loans:
- Rural Housing Guaranteed Loan Program: This is the most popular USDA loan program. Targeted at average income households, this USDA program requires applicants to have income of up to 115% of the median household income of their surrounding area. The Guaranteed Loan Program offers some of the lowest mortgage rates without a down payment.
- Rural Housing Direct Loan Program: With the Rural Housing Direct Loan program, very low income borrowers can purchase, build, repair or relocate a home within a rural area. This option is meant to encourage borrowers to make their rural home safe and sanitary.
What if You Qualify for Both?
Typically, for those who qualify, USDA loans are an attractive option. The USDA doesn’t require any down payment, nor does it require any mortgage insurance. Additionally, USDA mortgage rates are better than what the FHA offers. If, however, you would rather have more flexibility in where to live (or may buy another home in the near future), FHA loans may be the better option for you.