Wednesday, September 5, 2012

Which loan is better? FHA or Rural Development?

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Which loan is better?   FHA or Rural Development?

That all depends on you and your needs. Let’s look at the pros and cons of each loan.

FHA loans are great.  On the plus side is the minimum down payment of 3.5%.  You CAN put more down but it’s not required.  If you don’t have a lot of savings you can even get all the money you need for your down-payment and closing costs as a gift from a relative.  Plus the seller is allowed to pay up to 6% of the sales price towards your closing costs and pre-paids.  The seller can’t pay more than the costs actually are though.  Your minimum investment has to be that 3.5% minimum, none of which can come from the seller.  FHA is also much more lenient about credit issues than other loan programs are, but my favorite FHA feature is the fact that all FHA loans are assumable.  That means that when you decide to sell your home in the future and you have an FHA mortgage at a nice low rate, your buyer can give you a down-payment and just take over your lovely low payments, no matter what interest rates are doing at the time.  They need to go through an approval process but once they do, you are totally relieved of any liability from that mortgage.
Now to the not so great features of the FHA loan.  The biggest one is mortgage insurance.  Up front mortgage insurance is currently at 1.75%.  That amount gets added on to your loan.  There is also an annual fee of 1.25%.  One-twelfth of that gets added to every monthly payment you make.  You are required to keep that mortgage insurance in place until you have 22% equity or five years, whichever comes later.  There are also maximum loan limits by county and those may affect your ability to use this loan for your purchase or refinance.

Now on to Rural Development or USDA. Those terms are interchangeable.  You hear both because the US Department of Agriculture guarantees the loans.  The best thing about this loan is that there is NO down-payment required!  Plus the seller is allowed to pay all reasonable and customary costs.  Just in case your seller has not agreed to pay for all the closing costs, you may still get lucky.  With Rural Development loans, you are allowed to finance 100% of the appraised value, so if your house appraises for more than the sales price, we can increase your loan amount to cover some or all of your closing costs.
The cons to a USDA loan is that the Guarantee Fee of 2% gets added to the loan amount.  Plus, like with FHA, there is an annual fee of .4% which gets added to your monthly payments.  The biggest difference is that with RD loans, you must carry that mortgage insurance for the life of the loan.  Or you can refinance.  There is no prepayment penalty with either FHA or RD.  There are also geographic and income limits.  In most of our area, the income limit for a family of 4 is $92,600.  Don’t be confused by the name Rural Development.  Oddly enough, they will not allow any income producing properties – so no farms.  Rural does not mean that the property needs to be in the country either.  In Washtenaw County, most everywhere which is not in the city limits of either Ann Arbor or Ypsilanti is eligible. ALL of Livingston County is eligible.  To find out if the property you want to buy is in an approved area, just go to www.isitrd.com and put in the address. 

There is another large distinction between FHA and RD and that has to do with your debts.  With FHA, if you have a student loan but you can prove that payments on that loan are deferred for at least 12 months after closing, we won’t count that payment against you.  Likewise if you are divorced and your former spouse makes the payments on your former marital home as ordered in the divorce decree, we won’t count that against you either.  With Rural Development loans, in both of those instances, you would need to qualify for the payments even though you do not make them.

To summarize, I typically find that the out of pocket money is less and the monthly payments are lower on an RD loan than with FHA.  Both FHA and USDA loans are great options for financing.  Call me at 734.238.3MTG (684) or go to my website at http://www.peggyloans.com and we’ll figure out which loan is best for YOU.


Peggy Wilson
Senior Mortgage Banker
HURON VALLEY FINANCIAL
2395 Oak Valley Drive, Suite 200
Ann Arbor, MI 48103
Phone: 734.238.3MTG (684)
Fax: 734.669.6559
MI Mortgage License #133950



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