USDA Guaranteed vs Direct Loans: Which Is Better for Rural Homebuyers?

Buying a home in a rural area comes with its own unique challenges. With fewer mortgage options available, financing can be difficult for rural homebuyers. That’s where USDA loans come in. These government-backed mortgages make homeownership accessible for low- to moderate-income buyers in eligible rural locations.

When exploring USDA loans you’ll find two main options

• USDA Guaranteed Loans
• USDA Direct Loans

But what’s the difference and which loan works better for you?

In this comprehensive guide, we’ll dive into the pros, cons, eligibility, and processes for USDA guaranteed versus direct loans. Read on to demystify these mortgage products and determine which fits your homebuying needs.

An Overview of USDA Guaranteed and Direct Loans

First, let’s look at how both loans work at a high level:

USDA Guaranteed Loans

With a USDA guaranteed loan, a private lender funds the mortgage. But it’s backed by a government guarantee from the USDA. This guarantee protects the lender from losses if the borrower defaults.

Thanks to the USDA’s guarantee, lenders can offer more flexible terms. Guaranteed loans are easier to qualify for than conventional mortgages.

USDA Direct Loans

USDA direct loans work differently. With these mortgages, the USDA itself acts as the lender. Local Rural Development offices provide the financing directly to eligible homebuyers.

Direct loans help lower-income buyers who may not qualify through private lenders. They come with subsidized payment options based on income.

Now that you understand the basics, let’s dig into the key differences. We’ll compare eligibility requirements, loan terms, fees, and more.

Comparing Eligibility for USDA Guaranteed vs Direct Loans

Your eligibility depends on factors like income limits, credit requirements, and property location. Here’s how eligibility stacks up for both loans:

Income Limits

USDA guaranteed loans are for moderate-income borrowers. The income limit is 115% of the median income for your county. For a family of four nationwide, that equals $115,600.

Direct loans are for very low- to low-income borrowers. Your income must fall between 50-80% of the median income where you live. These strict income thresholds are much lower.

Credit Requirements

Guaranteed loans have no minimum credit score. Requirements vary by lender. But you must have an acceptable credit history.

Direct loans also lack set credit standards. The USDA reviews your creditability case-by-case. They want to see you can budget and make loan payments.

Location Requirements

Both loans require buying a home in a USDA-designated rural area. You can double check your location using the USDA’s eligibility tool.

Property Requirements

The home must be modest, decent, safe, sanitary and not exceed 2,000 square feet. A full appraisal ensures it meets requirements.

As you can see, eligibility does vary between loan types. In particular, direct loans target much lower incomes than guaranteed loans.

Comparing Loan Terms for USDA Guaranteed vs Direct Loans

Beyond eligibility, loan terms themselves also differ quite a bit:

Loan Amounts

Guaranteed loans come with no limit on the loan amount. You can borrow up to 100% of the home’s appraised value.

For direct loans, loan limits based on the area’s median income do apply. The maximum loan amount for low-income borrowers is $140,000.

Interest Rates

Private lenders set rates for guaranteed loans. They’re typically based on market rates. USDA direct loans offer below market interest rates set by the government.

Loan Term Length

You’ll repay a guaranteed loan over 30 years. Direct loan terms are 30 years for moderate-income borrowers and 33 or 38 years for low-income borrowers.

As you can see, direct loans offer more flexible repayment terms to help lower-income buyers.

Comparing Fees for USDA Guaranteed vs Direct Loans

Both loans come with their own mix of fees:

• Guaranteed Loans: You pay an upfront guarantee fee of 1% of the loan amount and an annual fee of 0.35%.
• Direct Loans: No recurring fees apply. But you may pay a $25 credit report fee and appraisal costs.

So direct loans end up with lower ongoing costs. But you pay appraisal fees upfront.

Comparing Benefits of USDA Guaranteed vs Direct Loans

Let’s summarize the top perks borrowers can enjoy with both loans:

Benefits of USDA Guaranteed Loans

• Requires no down payment
• Available from private lenders
• Features flexible underwriting
• Buyers can exceed income limits for direct loans
• Offers credit to buyers with scores as low as 580

Benefits of USDA Direct Loans

• Requires no down payment
• Designed for very low- to low-income buyers
• Features below market interest rates
• No mortgage insurance fees
• Offers 33-38 year loan terms
• Can finance home repairs and renovations

As you can see, both provide affordable 100% financing options. But direct loans cater specifically to lower-income buyers.

Comparing Drawbacks of USDA Guaranteed vs Direct Loans

There are also a few potential drawbacks to weigh:

• Both require buying in rural locations only
• Limited availability of direct loans
• Difficult to refinance out of either loan
• Guaranteed loans require recurring annual fees
• Home size limits on direct loans

The big takeaway? Shop around to find a direct loan lender, and factor fees into your long term costs.

How Do I Apply for USDA Guaranteed vs Direct Loans?

Ready to move forward with one of these options? Here are the steps to apply:

Guaranteed Loans: Contact approved USDA lenders like banks or credit unions to start the application.

Direct Loans: Locate your local Rural Development office to submit an application directly to the USDA.

No matter which route you choose, the lender will guide you through providing documents to verify income, assets, and credit.

Which Is Better – USDA Guaranteed or Direct Loans?

There’s no one-size-fits-all answer to this question. The right loan depends on your specific financial situation.

Here are a few key questions to ask yourself:

• Is my income above or below the median for my county?
• Can I qualify for a loan with a private lender?
• Will I benefit from the subsidized payments of a direct loan?
• Does the home I want comply with direct loan size limits?

Think carefully about your unique needs. If you have additional income available, a guaranteed loan likely makes more sense. But for lower-income buyers, direct loans provide the best terms.

Get Help Choosing the Best USDA Loan

As you can see, USDA guaranteed and direct loans take different approaches to helping rural buyers. But both provide affordable financing options for eligible borrowers.

For additional guidance, don’t hesitate to contact me. I’m happy to offer tailored advice on choosing and applying for the optimal USDA loan. My team and I can walk you through the process from start to finish. Reach out today to get started!