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USDA Guaranteed Home Loan vs the USDA Direct Loan

Updated November 30, 2018

USDA Direct Loan vs USDA Guaranteed Loans

Many don’t realize that there are two types of Section 502 Single-Family Rural Housing Loans and mistake the USDA Single-Family Direct Loan with the Single-Family Guaranteed Loan.

The USDA created both loan programs to boost homeownership in rural and suburban areas. But the two programs have key differences and are meant for two very different situations.

USDA's Rural Housing Loan Options

The purpose of the USDA's two rural housing loan options is to help drive economic growth in rural and suburban areas by making homeownership affordable in those areas.

The USDA guaranteed loan is meant for low- to moderate-income families and is the more popular USDA loan option. The USDA direct loan is meant for very low-income families and is not available through this site or from any lender.

The primary difference between USDA direct loans and USDA guaranteed loans is who funds the actual loan. With the USDA direct loan, the USDA acts as the lender. Conversely, with the guaranteed loan program, private lenders fund the loan while the USDA backs each loan against default.


This section breaks down additional differences between the two loan programs.

Compare: USDA Direct vs USDA Guranteed

While both programs offer the main benefit of USDA loans – $0 down financing – there are significant differences between the two, primarily because each program is meant for a specific situation.

Those eligible for the USDA direct loan must make between 50-80 percent of the median income for the area, adjusted for household size; be without decent, safe and sanitary housing; and be unable to obtain a loan from other resources with terms and conditions that the borrower can be reasonably expected to meet.

Here's a quick look at each program's basic eligibility requirements:

Eligibility Requirements for USDA Direct vs Guaranteed

Topic

USDA Direct Loan

USDA Guaranteed Loan

Minimum Credit Score

640

640

Base Income Limit

50-80% of Area's Median Income

115% of Area's Median Income

Household Income Limit

1-4 Member Household = $50,100
5-8 Member Household = $66,150

1-4 Member Household = $82,700
5-8 Member Household = $109,150

Property Requirements

Home must be structurally sound, functionally adequate, in good repair and located in a "rural" area.

Home must be structurally sound, functionally adequate, in good repair and located in a "rural" area.

Occupancy

Home must be your primary residence.

Home must be your primary residence.

Max Loan Amount

Property must be less than 2,000 square feet.

No limit.

Credit

Guaranteed loans are subject to the credit and income requirements of both the lender and the USDA. Most lenders require at least a 640 score in order to use the USDA's guaranteed underwriting system (GUS).

Those applying for direct loans must demonstrate a satisfactory credit history and the ability to pay the USDA-set monthly mortgage payments. All applicants must demonstrate the ability and desire to repay the mortgage.

Income

The USDA guaranteed loan caters to the average income borrower. Applicants can have an income of up to 115% of the median income for the area, adjusted for household size and allowable deductions.

The USDA direct loan is for very low to low-income families. The very low-income limit is approximately 50 percent of the median income for the area while low is considered approximately 80 percent of the median income for the area, both adjusted for household size.

Property

Direct and guaranteed loans both require the home to be structurally sound, functionally adequate and in good repair. A qualified appraiser will ensure the home meets the USDA's minimum property requirements.

A few of those standards for direct loans include:

  • Property size must be 2,000 square feet or less,
  • Market value cannot exceed applicable area loan limit,
  • No in-ground swimming pools,
  • No income-producing properties or features.

Process for USDA Direct vs Guaranteed

Because the USDA acts as the lender for direct loans, the actual process of applying for the loan slightly differs from USDA guaranteed loans.

Here's a quick overview of each loan program's process:

Topic

USDA Direct Loan

USDA Guaranteed Loan

Application

Submit application directly to your local Rural Development Office.

Apply directly with a lender who will submit underwritten file to GUS for approval.

Interest Rates

Fixed rate based on current market rate at loan approval or loan closing, whichever is lower. Current rate is 3.25 percent.

Fixed rate determined by lender based on qualifying factors.

Loan Terms

Loan term is 33 years and 38 years depending on income level.

Traditional 15-year and 30-year options are available.

Fees

No mortgage insurance is required.

Two forms of mortgage insurance:
an upfront guarantee fee, and annual mortgage insurance premium paid as part of your monthly mortgage payment.

Lowered House Payments

Subsidies available to lower interest and monthly mortgage payment.

Not applicable.

Interest Rates and Loan Terms

The USDA guaranteed loan has both 15-year and 30-year fixed-rate options. With the USDA guaranteed loan, your USDA-approved lender determines your interest rate, not the USDA.

USDA direct loans have repayment options of 33 years and 38 years depending on income level. The interest rate can be predetermined if the borrower uses a payment assistance subsidy, which could lower the rate to as low as 1 percent.

Fees and Closing Costs

Both loan programs allow for the buyer to roll closing costs into the loan and for the seller to pay part of the closing costs. Borrowers should expect to pay for the appraisal, home inspection (optional, but highly encouraged), credit report and escrow charges, among other things.

Direct loans do not require mortgage insurance, whereas the guaranteed loan program charges two forms of mortgage insurance: an upfront funding fee and an annual premium that is paid monthly.

Benefits of Each Program

The USDA direct loan is beneficial for very low-income families who cannot obtain a home loan through traditional means. Because of the income standards on the direct loan, there are more restrictions as to loan limits and home size.

As for the USDA guaranteed loan, there are many benefits over a conventional mortgage. Some of these benefits include:

  • Zero money down financing.
  • No private mortgage insurance.
  • Closing costs and lender fees can be rolled into the loan.
  • Gifted funds, grants, Mortgage Credit Certificates (MCC's) and seller concessions can be used.
  • Renovation and repair costs can be included in the loan amount.

Contact your local Rural Development office to find out if you are eligible for a 502 direct loan or see if you qualify for a USDA guaranteed loan here.

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