USDA Direct Loan Vs. the USDA Guaranteed Mortgage

Many people mistake the Rural Housing Guaranteed Loan for the Rural Housing Direct Loan. The two programs have a few key differences and are meant for two very different groups.

As for the 502 USDA Guaranteed Mortgage, rural borrowers can obtain a loan with key benefits that you won’t find with any convention program; however, the direct loan is intended for very low income individuals who would not be able to obtain any sort of financing for a suitable residence otherwise. Other key differences include the following:

Source of Funding

The government backs a portion of the Guaranteed loan, but borrowers must visit an approved lender to take out the loan. For example, USDALoans.com is a USDA approved lender that provides this service.

As for the 502 Direct Loan, the government directly funds the borrower.

Eligibility for the Program

Income

The Guaranteed Housing Loan caters to the average income borrower. Applicants can have an income of up to 115% of the median income for the area.

The Direct Housing Loan is for very low to low-income families. An income below 50 percent of the area median income is considered very low, while low sits between 50 and 80 percent.

Credit Requirements

Guaranteed Housing Loans are subject to the credit and income requirements of both the lender and the USDA. Most lenders want their borrowers to have at least a 620 score with no foreclosures, bankruptcies or major delinquencies in the past several or more years. All applicants must present a decent credit history, demonstrating the ability to pay mortgage, including taxes and insurance, on time each month.

Families applying for the Direct USDA Loan must demonstrate a good credit history and the ability to pay the USDA set monthly mortgage payments; they must also NOT be able to receive credit with a traditional mortgage. Because this loan is available to very low income persons, payment subsidy is available to them to help with repayment.

Loan Terms

Guaranteed Loans are fixed at 30-years, but will have a 15 year option beginning in September of 2014. With the 502 Guaranteed Loan, your USDA-approved lender determines your interest rate, not the USDA.

Direct Loans have a repayment option 33 years and 38 years–33 years for borrowers with an income above 60 percent of AMI. Manufactured are subject to 30-year term loans. The government (HCFP) set’s the interest rate. The interest rate can be predetermined if the borrower uses the payment assistance subsidy.

Benefits of Each Program

The Direct Loan is very beneficial for very low income individuals who cannot obtain a home loan through conventional means. Ones who otherwise could never own a home save money living in a rural area and can buy a modest dwelling. Because of the income standards, there are more restrictions as to loan limits and dwelling structure. People who work up their income and credit to a higher level can experience the numerous benefits of the Guaranteed Loan as stated below.

The Guaranteed Loan boasts some distinct benefits:

  • 100% financing
  • Guarantee Fee rolled into the loan amount (102 percent financing)
  • No maximum purchase price. A person’s income and debt-to-income ratio will determine the logical home price.
  • Many Property Types Allowed, including new and existing homes, modular homes, Planned Unit Developments (PUD), condominiums and brand-new manufactured homes.
  • Closing costs and lender fees can be rolled into the loan.
  • Gifted Funds, Grants, Mortgage Credit Certificates (MCC’s) and Seller Concessions accepted.
  • Renovation and Repair Costs Can be Included in the Loan Amount.