When it is finally time for you to buy a house, you are faced with many options. If you are a first-time homebuyer or a homebuyer entering back into the housing market after overcoming a foreclosure in the past, you might not have a lot of money to put down on the home. The good news is that there are several loans at your disposal, unlike in years past. The bad news is that you will have to pay mortgage insurance on any loan you get. If you are entertaining the thought of a USDA or FHA mortgage, you need to understand what you will be charged for FHA or USDA mortgage insurance.
What is Mortgage Insurance?
Mortgage insurance is premiums that are paid are used to offset the mortgages that the government must pay when the borrower defaults on the loan. There are many differences between FHA and USDA mortgage insurance, the most prominent being the fact that insurance for a USDA mortgage never gets eliminated. This is in stark contrast to the FHA loan or even a conventional loan, which cancels mortgage insurance once the loan hits a 78 percent loan-to-value ratio. There are good and bad sides to the requirement to pay mortgage insurance premiums throughout the life of the USDA loan. On the negative side is the fact that you are stuck paying these premiums for up to 30 years. The positive side; however, is the fact that you are able to get a mortgage in the first place. If you are putting next to nothing down on the home, you really would not get any other type of loan, so you will need to take what you can get and pay the premiums.
Calculating the Difference Between FHA and USDA Mortgage Insurance
There are several differences between the FHA and USDA loan, including the amount of insurance that you must pay. Both loans have an upfront mortgage insurance fee; the FHA insurance fee is 1.75 percent of the loan amount while the USDA upfront insurance fee is 2 percent of the loan amount. At first glance it seems as if the FHA loan would be the better choice, but both loans charge an annual mortgage insurance fee as well. The FHA charges 0.85 percent per year and the USDA charges 0.4 percent per year. If you were looking at a $200,000 loan, the FHA mortgage insurance would be $141.67 for the FHA loan and $66.67 per month for the USDA mortgage insurance. Over the course of a year, that is a difference of $900 more for the FHA loan. When you figure the difference between the two upfront mortgage insurance fees, the USDA loan is only $500 more, which you would make up during the first year of savings on the FHA mortgage insurance.
Deciding Between the FHA and USDA Mortgage
There are several factors that you will have to consider when trying to decide between the FHA and USDA loan. Aside from the mortgage insurance premiums, you will need to see if you qualify for the USDA loan. If the property you are planning on purchasing is not considered rural, you are automatically excluded from the USDA program. In addition, if you make too much money – meaning that you make more than 115% of the median income for your area, then you are also excluded. If you fit these two criteria, then the choice will be easier. The next factor you will need to consider is how long you plan on staying in the home. If you this is going to be your forever home, you could be stuck paying USDA mortgage insurance for the next 30 years as it does not cancel. FHA insurance, on the other hand, does cancel, which means that in the long run you would save more money. If you are not going to stay in the home forever, the choice is easy – you would go with the USDA loan.
The government provides many options for people that have low to moderate income when it comes to purchasing a home. No longer is it necessary to be “rich” or have a large down payment. You can have low income, yet show consistency and responsibility and be able to secure a mortgage. You will have to pay the price with FHA or USDA mortgage insurance, but these payments are not the end of the world, especially if they help you to secure the mortgage you need to purchase the home you want. The USDA loan program will start to change as of October 1, 2015, which means if you are interested in this program, now is the best time to get started before more people become ineligible for this government backed program.