Conventional loan vs usda loan?
Conventional and usda loan, whats the difference and which would be better ? Would the interest rate be the same on both? Do they both require mortgage insurance? If i need a down payment i would only have 5%.
- BobLv 66 years agoFavorite Answer
There is good and bad for both, and your individual circumstances will determine which is better for you. To qualify for a USDA loan you must meet median income guidelines for your area and family size. They are only available in rural areas and small towns with populations of 25K or less, which may include what most people consider suburban areas. The link below is for the USDA eligibility website which will allow you to enter an address to check for eligibility and check income limits for your area.
Both programs will require mortgage insurance, but the rates and terms are not the same. With USDA the rate for everyone is .4% of your loan balance per year so it decreases as you pay down the balance but you'll pay it for the life of the loan. With conventional it continues at least until your balance is paid down to 80% of current appraised value or 78% of value at the time of your loan. With 5% down the annual rates vary between .54% and 1.15% of your original loan amount depending on your credit score so it could cost substantially more. It will take about 11 years to eliminate mortgage insurance making just regular payments. USDA also has an up front 2% Guarantee fee added to your loan balance that conventional loans do not have. USDA also requires a separate approval which can add time to process your application. Right now in my area that is only a few extra days, but in December it was adding a month or more.
With a credit score under 720 there is a good chance your payments will be lower with a zero down USDA loan than they will be with a 5% down conventional. USDA will also allow the seller to pay "reasonable closing costs", while they are limited to 3% of the purchase with a 5% down conventional loan. There is also the advantage of being able to keep more of your funds in the bank for a rainy day. Talk to a good loan officer to compare programs and choose the one that is best for your situation.
Licensed Loan Officer in Ohio
- Ryan MLv 76 years ago
USDA loans are only available for VERY rural areas. Conventional loans have lower interest and you cannot get one with only 5% down....15% is bare bare minimum. If you have 20% down, you avoid mortgage insurance. USDA allows for 0% down but there is a LOT if government red tape. You don't pay mortgage insurance outright, but your higher interest and higher fees will more than make up the difference. So in summary...you personally don't have a choice between the two. If you don't have 15%...you must go USDA between the two. If you go USDA, you must buy somewhere in the sticks.
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Hi there, just wanted to say, I loved this discussion. very valuable answers