Chris Sanderson

What’s the Difference Between an FHA and a USDA Mortgage

The vast majority of first time home buyers purchase their first home with using either an FHA or a USDA home loan for their financing. These two options offer some great advantages as well as some negatives. Let’s take a look at the differences.

Hopefully after watching that video you have a bit better understanding of the difference between an FHA and a USDA home loan.

FHA Loans

FHA loans are by far the most popular of all loan options for first time home owners. The unique combination of low down payment, lenient credit qualifying, artificially low interest rates along with no income limits or property geographic limitations make this the loan of choice.

These loans are sponsored by the Federal Housing Administration (FHA) in order to increase availability of mortgage financing to those who have only a small down payment but still would like to purchase a home.

USDA Loans

A USDA loan, where available, offers true 100% financing. Obviously, this makes it a very popular program. All that glitters is not gold, however, as I explained in the video. I’m not opposed to using the USDA loan but I do believe strongly that a home buyer should clearly understand what they’re getting themselves into here.

The obvious advantages is the fact there is no down payment and there is no monthly mortgage insurance. But nothing is free. The USDA loan is no exception. The not-so-obvious disadvantage is that you are adding over 3.5% of the purchase price onto your loan in the form of a reservation fee. Therefore you are actually borrowing not 100%, but 103.5% of the purchase price. Additionally the loan is only available on certain addresses. Basically the program is designed to encourage “rural” housing. In other words, to increase sales of homes outside of major cities like Fort Wayne.

Why is that a big deal? Well, when you go to sell a home here in Indiana you need roughly 10% equity in the property just to break even (after paying pro-rated taxes, Realtor fees, closing costs, etc). With a typical 30 year loan this borrower will not have 10% equity in their home (starting with 103.5% and assuming flat housing prices) for roughly 7 years! So, you’ve made your mortgage payments from August 2011 all the way through August 2018, you go to sell your house and walk away with… Nothing? Ouch!

Now pointing this out won’t be popular with many Realtors and even more builders. Builders can charge a premium for homes in areas that offer USDA 0% down financing because it EASY to get into the house. If you plan to purchase one of these home because you can get in with very, very little “skin” in the game, just remember, it’s “pay me now or pay me later.” Facts are the facts and you deserve to understand your options.

Personally, I encourage buyers who are using the USDA loan to set up AUTOMATIC extra principal payments along with their mortgage payments. On a $100,000 mortgage you can dramatically reduce your principal balance quickly by just adding an additional principal payment of 10% of your payment each month. Many people I’ve seen have the best of intentions, but unless it is set to AUTOMATICALLY get paid, alas, the extra payment loses out to an iPad, or braces, or a cruise, or even Starbucks. Don’t let that be you!

For a detailed post on USDA loans click here.

What’s the Difference Between a Home Appraisal and a Home Inspection?

I get it! Everyone is looking to save money when possible on the purchase of a home. But friends, the argument that since the lender will be appraising the house you can go ahead and skip the home inspection. NOT a good idea! Here are the major differences, as I see them, between a home appraisal and a home inspection.

The Home Appraisal

First, let’s take a look at the home appraisal. The purpose of the home appraisal is to get an independent opinion of value. It will confirm to the lender that the house they are considering loaning money against is worth at least as much as the buyer has offered to pay for it. Sometimes a misguided buyer just has to have that cute little bungalow because of that maple leaf shaped swimming pool and the granite island in the kitchen. Here’s the problem: They’ve been looking for a maple leaf shaped swimming pool and this is the only one they’ve found. So, yes, $150,000 seems a little high, but who’s counting when you find that perfect pool! The buyer can agree to buy. And the seller can agree to sell. But when the lender finds out that similar houses are actually only selling for $125,000 the lender will not make the loan based on the $150,000 purchase price. The lender will lend based on the real market value of $125,000. So, either the deal falls through or the buyer makes up the $25,000 difference with their own cash.

The licensed home appraiser will pull “comps.” Comps are homes that have sold in the past 12 months that are similar to the house being appraised (called the “subject property”). Generally the appraiser will find 3 comps that are similar in age, size, location, bedrooms and baths. They will make “adjustments” to the value if they cannot find identical homes that have sold. Based on the sales price of the comps the appraiser will determine their opinion of the subject property’s fair market value.

So, as you can see the appraisal is to protect the lender, NOT to inspect for the condition of the house. Yes, if something is grossly and obviously wrong with the house the appraiser will catch it. But the appraiser does not go to the home with the idea of checking the furnace, roof, wiring, plumbing, termites, etc.

The Home Inspection

The home inspections is wildly different from the home appraisal. First off, it has nothing to do with your mortgage. You can get a mortgage without a home inspection, but probably not without a home appraisal (unless you’re putting down a VERY large percentage of the purchase price).

The home inspection is contracted and paid for by the buyer of the home. A licensed home inspector will inspect for major defects all the major components of the home: i.e. foundation, roof, plumbing, electrical, heating, air conditioning, appliances, outlets, windows, insulation, etc.

At the completion of the home inspections, which take from 2-5 hours, and cost from $225 – $600, the buyer will receive a copy of a very detailed home inspection report. As you can guess, the home inspector does not generally offer an opinion of value as the appraiser does, but rather a report of the condition of the home. In the case where a “major defect” is discovered, the buyer may complete an “inspection response,” requesting that the seller repair the major defect. The seller may choose to correct the defect, in which case the buyer is obligated to purchase the home. Or, the seller may determine that they are not willing to correct the defect. If the seller refuses the purchaser should be able to recover their “earnest money deposit” from the seller. Occasionally the seller will disagree with the inspector’s findings, which can get pretty interesting, but that’s a different post altogether!

Hopefully you are now much clearer on the difference between a home appraisal and a home inspection.

Your next loan in Indiana

When you’re ready to get your next loan in Indiana, I would love to help you. My pledge, as always, is to treat your money as if it were my own. I will treat you as a friend, not just a file.

Fort Wayne Rising Real Estate Star Duane Miller

I hate to say it but it’s true: Real estate offices (with a few outstanding exceptions) are just pretty darned impersonal, functional places. Heck, let’s just say it: They’re BORING! But NOT Duane Miller’s out at the Coventry office of Coldwell Banker Roth Wehrly Graber!

DIFFERENT IS GOOD – Just ask Duane. He’s taken the Fort Wayne real estate market by storm, finding himself in the top 10% of Indiana Realtors within his first 12 months in business – a task absolutely unheard of in such a short period of time.

“That’ll never work here!” was a favorite refrain from the ”old timers” back in my real estate days at Charleston Better Homes & Gardens. It seemed back then that the majority of Realtors would fight every single attempt at differentiation. It was as though they didn’t have the energy or boldness to try something new themselves, and therefore, rather than encouraging me they would let me know ‘That’ll never work here.” I didn’t let that dissuade me from become the “South Side Specialist.” It didn’t dissuade me from running a fun, tongue-in-cheek TV campaign where I ran for “Fort Wayne’s Favorite Realtor” during the political campaigns.

I’d bet there was a whole lot of grumbling when Duane began bringing in modern Scandinavian furniture and dramatic lighting. And when he brought in 3 monitors and painted the walls (***gasp***) mustard, I would bet my rental houses that the words “That’ll never work here!” were expelled by at least a few die-hard old-timers! LOL.

To that I say “Congratulations, Duane! It can work. It will work. And it DID work.” See you at the top.

You can reach Duane for all your real estate needs either by email at dmiller@cbrwg.com or via his batphone at (260) 437-8088.

And, by the way, HAPPY BIRTHDAY, Duane!

Fort Wayne Showcase Day 8 - Happy Mothers' Day

Special feature today for my jammin', slammin' Mom! She moved from Fort Wayne, IN down to Sarasota FL a few years back so I'm sure missing her today... :-(

Pretty sure this was 1999. Daughter wishing a Happy Mothers Day!

Sycamore Hills Country Club brought in live bunnies for the kids... :-)

Mom with my sis Jill and her adorable daughter Camilla...

Mysterious as usual...

I love you, Mom!

Fort Wayne Showcase Day 7 - Bartholomew Fish and Baker Street

Dropped in on my friend Bartholomew Fish, Marketing Director for Baker Street. Sorry for the poor video quality. Doesn't do the place justice AT ALL! Hopefully you can still get a feel for this fantastic Fort Wayne treasure!

My personal favorite is the coconut shrimp, house salad and (of course) the mouth-watering pretzel bread! It was still about 10 degrees shy of being able to have our lunch out on the patio, but I highly recommend it when the temp gets over 70.

Best salads EVER!

Beautiful inside and out!

Terrific atmosphere!

Don't miss the amazing pretzel bread! YUM!

And good news to all of us in the Fort Wayne social media community - These guys are embracing social media bigtime! Drop by the Baker Street web site or connect with Bartholomew and Baker Street here:

Just across North Clinton from Kohl's (Northcrest)