For those looking to settle in rural or suburban areas, USDA home loans are a government-backed option designed to help expand homeownership in eligible areas. With great benefits like 0% down payment and competitive interest rates, these loans are a powerful option for borrowers lacking cash for upfront costs or simply wanting to save.
However, there are two different types of USDA loans, each with varying qualification requirements and characteristics: the USDA direct loan and the USDA guaranteed loan.
To fully understand which could be your better choice, let’s discuss USDA direct vs. guaranteed loan differences, benefits, and how to apply.
In a Nutshell
Both USDA direct and USDA guaranteed loans require 0% down payment.
USDA direct loans have lower interest rates and no mortgage insurance requirement.
The USDA direct loan is only available directly through the USDA and has strict income requirements, making it more difficult to qualify.
The USDA guaranteed loan is available through private lenders and has broader income restrictions, making qualifying easier.
Note: Neighbors Bank only offers USDA guaranteed loans.
What is a USDA Direct Loan?
USDA direct loans, also known as Section 502 Direct Loans, are offered solely by the United States Department of Agriculture (USDA). With these loans, the USDA acts as the lender and provides the funds needed to buy the property.
Borrowers can use USDA direct loans to purchase, build, improve, repair, or even refinance a primary residence in an eligible rural area, but they can’t use these loans for investment properties, second homes, or luxury features like pools. USDA direct loans are offered in up to 33- or 38-year fixed-rate terms, depending on the borrower’s income.
To qualify, borrowers must earn no more than 50-80% of the area’s median income and reside in an eligible rural area as determined by the USDA.
What is a USDA Guaranteed Loan?
USDA guaranteed loans, also known as Section 502 Guaranteed Loans, are available through private lenders, but the USDA still backs them to mitigate potential risk for private lenders. This backing allows lenders to offer benefits like a 0% down payment.
USDA guaranteed loans have similar uses to USDA direct loans. While purchase, new construction, and refinance options are available, USDA loans are not meant for second homes or investment properties. Additionally, cash-out or home equity options are not available. USDA guaranteed loans are only offered in 30-year fixed-rate terms.
To qualify for USDA guaranteed loan, an applicant’s household must earn no more than 115% of the area's median income and also purchase a home in a USDA-eligible area.
USDA Direct vs. USDA Guaranteed Loan Requirements
While USDA direct and guaranteed loans offer some similar benefits, the two have some key distinctions. Here’s a comparison of USDA direct vs. guaranteed requirements:
USDA Guaranteed vs. Direct
| USDA Direct Loans | USDA Guaranteed Loans | |
|---|---|---|
| Down Payment | 0% | 0% |
| Credit Score | No set credit score requirement | No set credit requirement, but most lenders require 620 or above |
| Income Limits | Households can’t earn more than 50-80% of an area’s median income | Households can’t earn more than 115% of the area’s median income |
| Property Location and Eligibility Requirements | The home price cannot exceed the area’s loan limit and the property must meet USDA minimum property requirements | The property must meet USDA minimum property requirements |
| Loan Terms | Fixed 33- or 38-year loan options, depending on the borrower’s income level | Fixed 30-year loan options only |
| Interest Rate | Fixed rate determined by the government. Typically, much lower than other mortgage loan rates | Fixed rate that varies by lender. Typically lower than conventional rates |
| Mortgage Insurance | Does not require private mortgage insurance | Does not require private mortgage insurance, but borrowers pay an upfront guarantee and annual fee |
Interest Rates
USDA direct loans feature fixed interest rates that may be additionally lowered depending on the borrower’s income, making monthly payments even more affordable. You can find the current fixed USDA direct loan rate on the USDA's website.
USDA guaranteed loans also carry competitive interest rates, which are typically lower than FHA and conventional loans. For these loans, the USDA provides a guarantee to the lender, meaning if the borrower defaults, the government covers part of the loss. This federal backing gives lenders confidence and allows them to offer lower rates than many conventional or even FHA loans.
Since the USDA backs guaranteed loans, lenders can offer favorable terms with no down payment required, but the exact rate you receive depends on factors like your credit profile, lender policies, and market trends.
Income Caps
USDA direct loans require that a household’s income does not exceed 80% of the area median income (AMI).
For example, if a county’s area median income is $100,000, everyone in the household could earn no more than $80,000 combined income in a year ($100,000 × 0.80 = $80,000).
On the other hand, USDA guaranteed loans have an income cap of 115% of the area’s median income. So, if we took the same average county income of $100,000, a household would be eligible as long as their combined yearly income was less than $115,000 ($100,000 × 1.15 = $115,000).
Property Eligibility Standards
To qualify for a USDA loan, a home must be located in an eligible rural or suburban area as defined by the USDA’s property eligibility map. Both loan types have the same eligible location areas.
Additionally, both loan types require that properties adhere to USDA minimum property requirements (MPR), which ensure the home is structurally sound, functionally adequate, and in good repair. This overall ensures that homes funded under these programs are safe and reliable for long-term residence.
Fees and Closing Costs
Both loans allow borrowers to roll certain closing costs into the loan amount. Gift funds, which allow family members and approved donors to help a homebuyer cover costs like the down payment or closing expenses, are also acceptable.
USDA direct loans do not require mortgage insurance; however, guaranteed loans have an upfront guarantee fee (1% of the loan amount) and an annual premium (0.35% of the loan amount).
How To Apply For a USDA Direct vs. Guaranteed Loan
Unlike USDA guaranteed loans, the USDA direct loan application cannot be started online. Applicants must visit their local Rural Development (RD) Office to apply for a USDA direct loan. These professionals will guide you through the application process and help you figure out whether a USDA direct loan is right for you. From there, the USDA works directly with the borrower throughout the loan process.
When it comes to USDA guaranteed loans, applicants can apply directly with any lender that offers them.
Neighbors Bank is proud to be a Top 3 USDA Lender†. To apply with us, you can fill out a few questions online without impacting your credit score, and a loan expert will contact you shortly.
USDA Direct vs. Guaranteed: Which is Better?
Income limits play a significant role in determining which USDA loan fits best.
The USDA direct loan is designed for borrowers with very low to low income. Because it’s limited to those who are least likely to qualify for other mortgage options, it comes with especially favorable terms: a fixed interest rate, no down payment, and no mortgage insurance.
Put simply, if you qualify for a USDA direct loan, it’s usually the best deal you’ll find.
In contrast, the USDA guaranteed loan has broader income and eligibility requirements, making it accessible to a much larger group of applicants.
Still Have Questions?
Contact us at 1-833-514-4190, and a Neighbors Bank loan expert will walk you through.
† Source: https://www.rd.usda.gov/media/file/download/sfh-lenderrankings.pdf
Emily Kittle is an experienced underwriter with a strong background in risk assessment, training, and loan decision-making. She excels at solving complex mortgage challenges and guiding loans to closing using creativity and critical thinking.
