USDA Direct Loan vs Guaranteed Loan
Borrowers can take advantage of two types of Section 502 Single-Family Rural Housing Loans: the USDA Single-Family Direct Loan or the Single-Family Guaranteed Loan.
The U.S. Department of Agriculture created both loan programs to boost homeownership in rural and suburban areas, but the two programs contain key differences. Read on for more information about each loan type and discover the program that works best for you.
The federal government directly funds the USDA Single-Family Housing Direct Loan. Low- and very-low-income applicants who likely wouldn’t qualify for traditional financing (such as through a conventional loan, which isn’t backed by a government program) can apply. This loan type offers payment assistance to reduce monthly costs and promotes homeownership among the most financially vulnerable rural households. Your adjusted family income determines your assistance amount.
Approved lenders backed by the USDA offer the USDA Single-Family Housing Guaranteed Loan. It’s available to low- to moderate-income borrowers to help people own primary residences in eligible rural areas. The loan allows applicants to purchase, build, rehabilitate, improve, or relocate with competitive interest rates and no down payment requirements.
The USDA's two rural housing loan options help drive economic growth in rural and suburban areas by making homeownership affordable.
The USDA Guaranteed Loan is meant for low- to moderate-income families, while the Direct Loan is meant for very low-income families.
The primary difference between Direct and Guaranteed Loans: the entity that funds each loan. The USDA acts as the lender for the Direct Loan. Conversely, private lenders fund the Guaranteed Loan program; the USDA backs each loan in case of default (in case you stop paying on your mortgage).
Both programs offer the main benefit of USDA loans — $0 down financing — but each program fits specific borrowers’ needs.
Those eligible for the USDA Direct Loan must:
The property must not be designed for income-producing activities. For example, it cannot function as a farm that makes money.
USDA Direct Loans do not have an upfront guarantee or annual fee, though borrowers may still encounter other costs, such as a $25 credit report fee and appraisal expenses.
Guaranteed Loans must meet income eligibility requirements — they cannot exceed 115% of median household income, agree to live in the home as their primary residence, and qualify as a U.S. citizen, eligible noncitizen, or qualified alien.
USDA Guaranteed Loans typically require borrowers to pay an upfront guarantee fee of 1% of the loan amount, along with an annual fee of 0.35% of the remaining loan balance, which borrowers usually pay through monthly mortgage payments.
Here's a quick look at each program's basic eligibility requirements.
| Topic | USDA Direct Loan | USDA Guaranteed Loan |
|---|---|---|
| Minimum Credit Score | 640 | 640 |
| Base Income Limit | Adjusted income at or below the low-income limit for the area | Cannot exceed 115% of area's median Income |
| Household Income Limit | 1-4 member household = $112,450 5-8 member household = $148,450 | 1-4 Member Household = $110,650 5-8 Member Household = $146,050 |
| Property Requirements | The home must be structurally sound, functionally adequate, in good repair and located in a "rural" area. | The home must be structurally sound, functionally adequate, in good repair and located in a "rural" area. |
| Max Loan Amount | Property must be less than 2,000 square feet. | No limit. |
Guaranteed Loans are subject to the credit and income requirements of both the lender and the USDA. There are no set credit requirements, but most lenders require at least a 640 score.
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.
The USDA Guaranteed Loan caters to the average income borrower. Applicants cannot exceed 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 $36,800 for a one- to four-person household ($112,450 for moderate income) and $48,600 ($148,450 for moderate income) for a five- to eight-person household.
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 of 2,000 square feet or less, market value cannot exceed the applicable area loan limit, and the property must not contain in-ground swimming pools.
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 5% or as little as 1% if you qualify for payment assistance. | Fixed rate determined by the 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. | Upfront guarantee fee and an annual fee paid as part of your monthly mortgage payment. |
The USDA Guaranteed Loan has both 15-year and 30-year fixed-rate options. Your USDA-approved lender determines your interest rate, not the USDA.
USDA Direct Loans have repayment options of 33 years or 38 years, depending on income level. Borrowers can qualify for a payment assistance subsidy, which could lower the rate to as low as 1%.
Both loan programs allow for the buyer to roll closing costs, which are fees and expenses to finalize a home loan, into the overall loan. The seller can also 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 fees, whereas the guaranteed loan program charges an upfront funding fee and an annual premium. You can roll the upfront fee into the mortgage.
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.
USDA Guaranteed Loan benefits include:
USDA Direct Loan benefits include:
Contact your local Rural Development office to find out if you are eligible for a Direct Loan or see if you qualify for a USDA guaranteed loan here.
