(Blane Stewart, Mortgage Guru and Kayaker)
Recently, I’ve been working with some couples looking to get Rural Development or USDA financing. My Loan Guru buddy Blane Stewart from SLS Mortgage wrote a great breakdown on the differences between the two most used 1st Time Home Buyer loans for our times: FHA and USDA. This has the pros and cons and is one of the most educational short reads on financing I’ve ever encountered. Enjoy.
USDA will fund 100% of the purchase price of a property with no down payment. This loan product is only eligible for areas not located in metropolitan areas. USDA has broken all areas down into eligible or non-eligible areas based on population density. This product also is only available for clients that fall in the median income level for those designated areas. Main purpose of this product is to promote affordable home ownership. In terms of qualifying for this loan product a borrower must have close to a 620 credit score to be eligible for this product. If you have a prior bankruptcy you may have problems being eligible for this loan product until the bankruptcy is discharged for 3 years. Non occupant co-borrowers cannot help borrowers qualify for this loan. If you have a prior foreclosure you may be ineligible for this product. This product is completely backed by USDA so it does not have MORTGAGE INSURANCE equaling a lower monthly payment for the borrower. In a purchase transaction this product allows the sellers to pay up to 6% toward the buyers closing cost. USDA allows borrowers to have their application and income documents be underwritten and approved for home loans before identifying an exact property. This means that the borrower’s income and credit is completely underwritten and approved before they even search for a home with a realtor. This assures the USDA client will be able to buy the right home with certainty. Rates for USDA and FHA are the same and generally put on a 30 year term. USDA IS ONLY USED FOR PURCHASE TRANSACTIONS. All government backed loans need appraisals, title work, termite, well and septic if applicable to fund transaction.
FHA financing will fund only 96.5% of the purchase price of a property equaling a 3.5% down payment (all of which can be gifted from a family member equaling NO MONEY DOWN from borrower). This product is eligible in both rural and metropolitan areas. This product is not driven by median income for area (no income limit). The main purpose of the product is to promote affordable home ownership. In terms of qualification for this loan product a borrower can have as low as a 500 credit score and be eligible for this product (much less strict than USDA). You can apply for this loan product just 2 years after filing, not discharging, a bankruptcy. If you have had a foreclosure you can apply for this product just two years after being foreclosed upon. This product is backed by private banking groups and federally chartered investment vehicles so it does require PRIVATE MORTGAGE INSURANCE. This insurance can be calculated by multiplying the loan amount by .55 percent (139,000 times .55 equals $764). This insurance continues to be paid by the borrower pays on the loan until the 181st payment is made on a 30 year mortgage (15 years!). FHA allows non occupant co-borrowers to help borrowers who cannot qualify with their own income and credit to help them buy a home. In a purchase transaction this product also allows the seller to pay up to 6% toward the sellers closing cost. FHA can be used for purchase, construction, debt consolidation and refinance loans, not specifically for purchases. This product also will not underwrite or review a file until a ratified contract has been signed so a seller/realtor/bank or relocation company cannot truly know they are approved until after a contract is ratified by both the seller and the buyer. This means they are solely relying on a pre-approval for their stake in the transaction. Rates for USDA and FHA are the same and generally put on a 30 year term. All government backed loans need appraisals, title work, termite, well and septic if applicable to fund transaction.
Blane Stewart, SLS Mortgage, bstewart@slsmortgage.com
Thanks to Blane for that tidbit.
Tags: FHA Morgages, Rural Development, USDA
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