Differences Between FHA And USDA Loans
USDA and FHA loans are run by two different government agencies, which means they have different application, underwriting, appraisal, lending amount, mortgage insurance and interest rate requirements.
Application Process And Underwriting
Regardless of which mortgage product you choose, the first step to homeownership is applying for preapproval, and that's true of both USDA and FHA loans. The preapproval shows home sellers you're serious about buying and assures them you may be approved for the mortgage.
You may also have the option of getting a prequalification, where the lender bases the decision on information that you provide. With a preapproval, the lender goes one step further by running a report on your credit history and requiring documentation such as tax documents and pay stubs to get an accurate picture of how much home you can buy.
Getting a USDA or FHA preapproval or prequalification will kick off the mortgage underwriting process so you can shop for a home without worrying about whether you'll actually be approved.
Closing With A USDA Loan
The process of getting a USDA loan may take longer than an FHA loan, largely because USDA loans are underwritten twice, first by the lender and then by the USDA. To have the loan automatically underwritten by the USDA, you'll need a credit score of 640 or higher.
Manual underwriting, which adds time to the loan closing, is reserved for those with scores under 640. The time it takes for underwriting depends on where you're planning to purchase and how much backlog the USDA agency in that area has. Expect a USDA loan to close in 30 – 45 days.
Closing With An FHA Loan
An FHA loan can also take 30 – 45 days to close, depending on the application process and how long underwriting takes. The application and preapproval portion of the loan process may take 1 – 5 business days. Processing and underwriting also depend on how quickly you provide necessary documentation, such as your employment status, income, tax returns and bank statements.
It's also dependent on how many parties are involved. If you work with a mortgage broker that isn't approved to sell FHA loans, they may have to bring another party into the transaction, which could delay the process.
Maximum Lending Amounts
FHA loans have maximum loan limits. In other words, you cannot buy a house that exceeds the amounts specified by the Department of Housing and Urban Development (HUD). The maximum FHA lending amount in 2023 for lower-cost areas is $472,030 and is up to $1,089,300 for high-cost areas.
Unlike FHA loans, there are technically no set loan limits for USDA loans. Instead, the maximum amount is set based on your repayment ability.
Appraisal
The appraisal is one of the most important aspects of the mortgage approval process, regardless of whether you apply for a USDA or FHA loan. An appraisal assures the lender that the house is sold at fair market value. It's a requirement for both types of loans and is vital in protecting you and your lender.
USDA Appraisals
In addition to ensuring that the home is properly valued, an appraiser for a USDA loan needs to confirm that the property is located in a rural area determined by the USDA and is safe to live in. The value of the site can't be more than 30% of the value of the home, and it must have access to a street and properly maintained roads.
FHA Appraisals
An FHA appraisal also has special requirements beyond an assessment of the value. The appraiser must determine the current market value of the property as well as ensure that the home meets FHA standards for health and safety.
Neither home loan requires an independent home inspection, but it is encouraged as a way to spot any problems. Major issues spotted by an inspector need to be fixed before the loan can close.
