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What’s the Difference Between a USDA Direct Loan and a USDA Guaranteed Loan?

Home Buying


JustChoice Lending

March 25, 2023

A United States Department of Agriculture (USDA) loan is an appealing option if you're looking to buy a home in a rural area. Not only do USDA loans come with perks like zero-down-payment options and lower interest rates, but they also have flexible credit score requirements. Additionally, they do not require borrowers to carry mortgage insurance, saving you thousands of dollars over the loan's lifespan.

Perks aside, it is important to understand the difference between a USDA Direct Loan and a USDA Guaranteed loan. The federal government backs both; however, they differ in eligibility requirements and application processes, which we'll explain below.

USDA Direct Loans

The USDA directly issues USDA Direct Loans to low-income borrowers who want to live in rural areas and might not be able to obtain a conventional loan. These loans offer subsidized interest rates and repayment options that can be adjusted based on the applicant's income. It's important to note that these loans are handled entirely by the USDA and do not involve a private lender.

Qualifying for a USDA Direct Loan

To be eligible for a USDA loan, you must meet the following criteria:

  • Income: First, you must meet the USDA’s definition of a “low” or “very low” income applicant. These requirements vary by state and the number of people in your household. For more specific information, you can browse income requirements by state here.
  • Citizenship: Borrowers must be U.S. citizens or have permanent residency status.
  • Credit: Applicants must have a credit score of at least 640 or show a credit history demonstrating "a willingness" to make timely payments.
  • Location: Your future property must be your primary residence and located in a USDA-designated “rural” location

USDA Guaranteed Loan

The primary difference between a USDA Direct and Guaranteed Loan is that Guaranteed Loans are issued by a private mortgage lender and designed for borrowers with “moderate” income status. Also, USDA Guaranteed Loans do require borrowers to carry mortgage insurance.

Qualifying for a USDA Direct Loan

  • Income: As with USDA Direct Loans, income requirements vary by state and the number of people in your household.
  • Location: As with a USDA Direct Loan, your home must be located in a USDA-approved rural area. You can browse the USDA property eligibility map here.
  • Credit: You must have a credit score of at least 640 or a credit history showing a willingness to make timely payments.
  • Employment: You must demonstrate that you have a history of employment and are currently working.
  • Debt-to-income ratio: Your debt-to-income ratio should not exceed 41 percent. In other words, your debts (credit cards, student loans, car loans, etc.) should not exceed 41 percent of your gross monthly income.
  • Residency: You must also be a U.S. citizen or be able to show permanent residency status.

JustChoice Lending: Your USDA Loan Experts

Whether you think a USDA Loan or a USDA Guaranteed Loan is right for you, our team is here to help! JustChoice Lending is a socially conscious mortgage lender that offers competitive rates and personalized service. We are USDA Loan experts who assist clients of all income levels, including those with imperfect credit, to secure the home of their dreams. Contact us to learn how we can help you.

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