The Affordability Gap Between USDA Loans and FHA Loans WidensDate: April 18, 2011
On April 18, 2011 FHA increased the Mortgage Insurance or MI on all FHA insured loans .25% across the board. This represents the second increase since October 2010, in which the ratio used to calculate FHA monthly mortgage insurance premiums has more than doubled from .50 to 1.15. This increase has made a FHA loan considerably more expensive compared to other financing options, particularly for homebuyers purchasing a home in a designated USDA Rural Development Area
A USDA Loan has no monthly mortgage insurance and no down payment requirements. The USDA Rural Development Loan is "Budget Neutral" meaning that the program, much like FHA, doesn't rely on government subsidies to fund the loan program. The USDA Loan charges the borrower a one-time upfront "Guarantee Fee" of 3.5% of the loan amount, which is financed into the loan, to fund the Rural Loan program.
Based on a $200,000 purchase price, a FHA loan with an interest rate of 4.50%, and a USDA loan with an interest rate of 4.75% (a USDA loan typically has a slightly higher interest rate than a comparable FHA loan) a homebuyer using the USDA Loan will achieve the following benefits over a comparable FHA Loan:
|Down payments savings: $7,000 (USDA down payment is $0 while FHA's down payment is 3.5% of the purchase price [$200,000 * 3.5%])|
|Monthly payment savings: $93 per month (USDA principal and interest is $1,081 Vs. FHA principal and interest of $987.68 + monthly mortgage insurance of $184.96)|
Another way to look at the benefits of the USDA Loan Vs a comparable FHA Loan is to analyze how much more house a borrower can buy when using USDA Financing. Based on the same parameters a homebuyer can buy $17,000 more house with a USDA Loan for the same payment as a $200,000 home purchase using a FHA Loan ($93 monthly savings/$5.41 USDA cost per thousand [1,081/200]).
In addition to what was discussed above, note the no-down payment requirement with the USDA Loan. Consider how much more house a borrower will qualify for based on their debt to income ratio if they applied their down payment savings of $7,000 toward paying off a credit card or car loan.
Realtors and homebuyers need to remember that there are geographic and income restrictions to the USDA Rural Loan Program. This loan program is designed to promote homeownership in rural communities for families with moderate incomes. Therefore it is important to verify if a property is located in a designated USDA Eligible Area and that the borrower's household income doesn't exceed the maximum income allowed by USDA. USDARuralLoan.com provides resources to lookup, by county, eligible USDA areas and maximum allowable household incomes.