Many don’t realize there is more than one USDA home loan and mistake the USDA Single-Family Direct Loan with the Single-Family Guaranteed Loan. The two programs have key differences and are meant for two very different financial situations.
The USDA direct loan is meant for very low-income families. Those eligible for the direct loan must make between 50-80 percent of the median income for the area, adjusted for household size; be without decent, safe and sanitary housing; and be unable to obtain a loan from other resources with terms and conditions that the borrower can be reasonably expected to meet.
The following are some of the differences in the program:
With the USDA direct loan, the USDA acts as the lender. Conversely, with the USDA guaranteed loan, private lenders fund the mortgage while the USDA backs a portion of each loan against default.
Requirements for Program
Guaranteed housing loans are subject to the credit and income requirements of both the lender and the USDA. Most lenders want their borrowers to have at least a 640 score so they can use the USDA’s guaranteed underwriting system (GUS). All applicants must demonstrate the ability and desire to repay the mortgage.
Families applying for the USDA direct loan must demonstrate a satisfactory credit history and the ability to pay the USDA set monthly mortgage payments. Because this loan is available to very low-income families, payment subsidy is available to help with repayment.
The USDA guaranteed loan caters to the average income borrower. Applicants can have an income of up to 115% of the median income for the area, adjusted for household size.
The USDA direct loan is for very low to low-income families. The very low-income limit is approximately 50 percent of the median income for the area while low is considered approximately 80 percent of the median income for the area, both adjusted for household size.
Terms of the Loan
The USDA guaranteed loan has both 15-year and 30-year fixed-rate options. With the USDA guaranteed loan, your USDA-approved lender determines your interest rate, not the USDA.
USDA direct loans have repayment options of 33 years and 38 years depending on income level. The interest rate can be predetermined if the borrower uses a payment assistance subsidy.
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.
As for the USDA guaranteed loan, there are many benefits over a conventional mortgage.
These are some of the benifits:
- No private mortgage insurance
- Gifted Funds, Grants, Mortgage Credit Certificates (MCC's) and Seller Concessions accepted
- Renovation and Repair Costs Can be Included in the Loan Amount
- Zero money down financing
- No private mortgage insurance
- Closing costs and lender fees can be rolled into the loan
USDA Guaranteed Home Loan vs the USDA 502 Direct Loan is available in the following areas/cities
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