Inside this article
Before diving into the world of USDA direct and guaranteed loans, it’s essential to understand what they are and how they can benefit individuals and families looking to purchase property in rural areas.
The USDA developed both loan programs to provide affordable homeownership opportunities while promoting economic growth in rural communities. Both loan types offer unique benefits and have different requirements to consider.
As you explore the similarities and differences between these loan options, keep in mind that Neighbors Bank only offers USDA guaranteed loans. We do not finance USDA direct loans.
Not sure if you're in a qualifying area? Check our property eligibility map!
What is a USDA direct loan?
USDA direct loans, also known as section 502 loans, are only available directly through the United States Department of Agriculture. Borrowers must make 50-80% of the area’s median income, which makes qualifying for this loan a little challenging if you don’t meet this criterion. In this borrowing scenario, the USDA serves as the lender and offers the funds necessary to purchase the property.
What is a USDA guaranteed loan?
USDA guaranteed loans are available through private lenders like Neighbors Bank but are still backed by the USDA to mitigate potential risk for these lenders. Applicants cannot make more than 115% of the area's median income to be eligible. This USDA loan option is often more favorable to borrowers, making it more popular than USDA direct loans.
Comparing USDA Direct and Guaranteed Loans
While both direct and guaranteed USDA loans offer the benefits of a USDA-backed loan, there are some key distinctions between the two. For a quick comparison of the USDA direct and guaranteed loans, consider the following aspects:
| USDA Direct Loans | USDA Guaranteed Loans | |
|---|---|---|
| Credit score requirements | No set credit score requirement | No set requirement, but a 640 credit score is recommended |
| Income limits | 50-80% of the area’s median income | Up to 115% of the area’s median income |
| Property eligibility | Must meet USDA minimum property requirements and be less than 2,000 square feet | Must meet USDA minimum property requirements |
| Loan terms | 33 or 38-year loan options depending on the borrower’s income level | 30-year loan option |
| Interest rate | Determined by government | Fixed rate (based on borrower’s loan application) |
| Mortgage insurance | Does not require private mortgage insurance | Does not require private mortgage insurance, but borrowers pay an upfront guarantee fee and annual insurance premium |
Application Process for USDA Direct vs. Guaranteed Loans
Applying for a USDA direct loan may be a little different from a USDA guaranteed loan since direct loans are only available through the USDA. Let’s take a closer look at the two application processes.
USDA Direct Loan Application
Unlike USDA guaranteed loans, there is no way to begin the application process online when applying for a USDA direct loan. Applicants must apply for a USDA direct loan with their local Rural Development Office (RDO). These professionals will guide you through the application process and help you figure out if a USDA direct loan is the right fit for you. From there, the USDA works directly with the borrower throughout the loan process.
USDA Guaranteed Loan Application
When it comes to USDA guaranteed loans, applicants can submit their application to a USDA lender like Neighbors Bank. These lenders work with the USDA throughout the loan process and are responsible for completing the loan application and underwriting process.
Pros and Cons of USDA Guaranteed Loans
Since direct loans are available directly through the USDA, Neighbors Bank only offers USDA guaranteed loans. If you’re looking to work with a lender throughout your homebuying journey, take a look below at the pros and cons of using a USDA guaranteed loan over a USDA direct loan:
| Pros | Cons |
|---|---|
| Higher income limit | Stricter credit score requirement |
| No maximum property size | Only offers 30-year loan term |
| Work individually with USDA lender | Additional fees (one-time 1% guarantee fee and 0.35% annual fee) |
The Bottom Line
In conclusion, USDA direct and guaranteed loans offer potential homebuyers in rural areas a unique homebuying opportunity. By understanding the differences and similarities between both USDA loan types, you can find one that is right for you!
Reach out to a Neighbors Bank’s loan specialist today to begin your homebuying journey!
