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A Guide To USDA Guaranteed Vs. Direct Loans

Sarah Sharkey6-minute read

May 27, 2021

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As a home buyer in a rural area, USDA loans can be an exciting opportunity. But as you explore your options, you’ll need to uncover the difference between USDA guaranteed vs. direct loans.

Luckily, we’ve got you covered! We’ll take a closer look at USDA guaranteed vs. direct loans.

Before we continue, it’s worth noting that Rocket Mortgage® doesn’t currently offer USDA loans.

What Are USDA Guaranteed And USDA Direct Loans?

USDA loans were mortgages created through the United States Department of Agriculture. Although it can be easy to confuse USDA guaranteed loans with USDA direct loans, the mortgage products have a few major differences.

USDA Guaranteed Loan

The USDA guaranteed loan is available to low- to median-income families. These loans are backed by the USDA to protect against default but are provided through a private lender. With that, these guaranteed loans are more popular than direct loans. 

To qualify, you won’t be able to make more than 115% of the area’s median income.

USDA Direct Loan

USDA direct loans are designed to help low-income borrowers in rural places attain homeownership. These loans are less widely available, but it’s possible to obtain a USDA direct loan through the USDA.

In this case, the USDA itself would act as the lender and provide the funds to purchase the property.

The USDA guaranteed loan is backed by the federal government, but a private lender will fund the actual loan. With the backing of the federal government, lenders are able to provide lower rates to you as a borrower. This can help you find an affordable housing option in a rural area.

The USDA direct loan is a little bit different. The USDA will act as the lender with USDA direct loans. That means you won’t have to work with a private lender, just directly with the USDA. With the USDA direct loan program, the goal is to help low-income families achieve homeownership.

Although the actual lender will vary, the primary benefits of a USDA loan are available through both options. As the borrower, you can obtain a home with no down payment and reduced mortgage insurance.

USDA Guaranteed Loans Vs. Direct Loans: What’s The Difference?

The USDA guaranteed loans and direct loans may seem very similar on the surface. After all, both provide opportunities for affordable homeownership in rural areas and can be especially helpful for first-time home buyers.

But there are some key differences between these two loan programs. Here’s what you need to know.

Income Limits

USDA guaranteed loans are targeted toward moderate-income borrowers. With the guaranteed loans, borrowers can have an income of up to 115% of the median income of the area. Plus, there’s an income limit of $90,300 for a one- to four-member household or $119,200 for a five- to eight-member household.

USDA direct loans are targeted toward lower-income households. With that, a borrower’s base income must be between 50% to 80% of the area’s median income. Plus, there’s an income limit of $50,100 for a one- to four-person household or $66,150 for a five- to eight-member household.

You’ll need to compare your adjusted gross income (AGI) to the area’s median income to see if you qualify.

Loan Terms

The loan terms for the USDA guaranteed loans are available as 30-years with a fixed-rate option. Since a private lender will be involved, they will determine the interest rate based on your loan application.

USDA direct loans offer less traditional loan term options of either 33 years or 38 years. The term you qualify for will depend on your income level. The interest rate attached to your loan will be set by the government.

Credit Requirements

The USDA guaranteed loan recommends you have a credit score of at least 640 to apply. With a credit score of 640 or higher, you’ll qualify for the streamlined credit analysis associated with the USDA guaranteed loan.

But you’ll still need to meet the credit requirements imposed by the private lender to close on the loan. Additionally, the USDA will generally require you to have a debt-to-income ratio (DTI) of 41% or less.

If you’re choosing to pursue the USDA direct loan, there are no strict credit guidelines to keep in mind. But you’ll need to prove you can make the monthly payments and have a desire to repay the loan.

Property Description

A key part of the process for both the USDA guaranteed and direct loans is finding an appropriate property. The property will need to be structurally sound, functional and in decent repair. Plus, it must be in a qualifying ‘rural’ location.

USDA direct loans have an additional requirement that the home must be less than 2,000 square feet. In either case, the property will have to undergo a home appraisal to ensure it meets the criteria before the loan is finalized. 

Great news! Rates are still low to start 2021.

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What Are The Benefits Of Guaranteed USDA Loans Vs. Direct USDA Loans?

As a home buyer in a rural location, USDA loans have a lot to offer. Let’s break down the benefits of USDA direct vs. guaranteed home loans.

Benefits Of USDA Guaranteed Loans

USDA guaranteed loans have several advantages over a conventional mortgage. The major benefits are the lack of a down payment and no loan limits. Here’s a full list of the benefits:

  • Zero down payment. Skip the process of saving for a down payment.
  • A wide variety of property types are covered. You can choose from many different property types.
  • Lending fees and closing costs are “rolled into” the loan. Less cash that you need to provide upfront.
  • Concessions like gift funds and grants can be used. If you qualify for a grant or receive a gift, you can use those funds.
  • Repair and remodel costs can be “rolled into” the loan. Not every home is move-in ready, and this can help you spread out the costs.
  • Minimal credit history requirements. A less-than-perfect credit score won’t hold you back.

Benefits Of USDA Direct Loans

As a low-income borrower, you have a lot to gain from the USDA direct loan program. With low credit opportunities, you can finally afford homeownership. Here’s a list of the benefits you can enjoy:

  • Zero down payment. Skip the process of saving for a down payment.
  • Funds can be used to build, repair, renovate or relocate a home. Not every home is move-in ready, and this can help you spread out the costs.
  • Very low interest rates. Government set rates will help you save on interest payments.
  • Extended mortgage payback periods. Spread out the cost of homeownership over a longer period of time.
  • Minimal credit history requirements. A less-than-perfect credit score won’t hold you back.

What Are The Drawbacks Of Guaranteed USDA Loans Vs. Direct USDA Loans?

Of course, there are some drawbacks to consider with both the USDA guaranteed and direct loans. Here’s what you should be aware of before jumping into either loan.

  • Geographical requirements. The program is designed to encourage rural development, which comes with strict boundaries.
  • Loans only available for primary residences. You can’t buy a second home with this loan.
  • Strict limitations for USDA streamline refinancing. Refinancing can be a challenge.

How Do I Apply For A USDA Guaranteed Or Direct Loan?

Ready to apply for a USDA guaranteed or direct loan? You’ll need to follow slightly different guidelines depending on which loan you choose.

Applying For A USDA Guaranteed Loan

You can apply for a USDA guaranteed loan directly through a private lender. Once you submit your application, the lender will submit the paperwork to the Guaranteed Underwriting System (GUS).

When you receive your interest rate on the loan, make sure that it fits your budget. And don’t forget about the two fees that come with the loan! The first is an upfront fee that is equal to 1% of the loan amount. The second is an annual fee equal to 0.35% of the loan amount.

Applying For A USDA Direct Loan

The USDA direct loan will not involve a private lender at all. Instead, you should apply at your local Rural Development Office.

You won’t run into any mortgage insurance fees with the direct loan. Plus, the market rate will reflect your current interest rate.

The Bottom Line: Don’t Sleep On These Rural Housing Loans

Now that you know a little bit more about the differences between USDA guaranteed vs. direct loans, you should have a better understanding of where you fit in.

Although Rocket Mortgage®️ doesn’t offer USDA loans, it can help you find the best loan option for your situation with its useful resources. Take some time to review your options and move forward with your homeownership dreams today.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.