These government loans may seem very similar on the surface. After all, both provide opportunities for affordable homeownership in rural areas and can be especially helpful for first-time home buyers. However, the two loan programs have some key differences. Here’s what you need to know. USDA guaranteed loans are targeted toward moderate-income borrowers. With the guaranteed loans, borrowers can have an income of up to 115% of the median income of the area. In most areas of the country, the standard income limit for 2023 is $110,650 for a one- to four-member household. Meanwhile, the limit is $146,050 for a five- to eight-member household.Income Limits
USDA direct loans are targeted at lower-income households. With that, a borrower’s base income must be 50% – 80% of the area’s median income. Income limits vary depending on the area in which you live but are typically much lower than with a USDA guaranteed loan. The most up-to-date limits can be found on the USDA’s website.
You’ll need to compare your adjusted gross income (AGI) to the area’s median income to see if you qualify.
Loan Terms
The loan terms for the USDA guaranteed loans are available as 30-year loans with a fixed-rate option. Since a private lender will be involved, they’ll determine the interest rate based on your loan application.
USDA direct loans offer less traditional loan term options of either 33 years or 38 years. The term you qualify for will depend on your income level. The interest rate attached to your loan will be set by the government.
Credit Requirements
The USDA guaranteed loan does not have a listed minimum credit score requirement and is determined on a case-by-case basis. However, some credit situations such as delinquent child support might make an applicant ineligible.
But you’ll still need to meet the credit requirements imposed by the private lender to close on the loan. Additionally, the USDA will generally require you to have a debt-to-income ratio (DTI) of 41% or less.
If you’re choosing to pursue the USDA direct loan, no strict credit guidelines are necessary to keep in mind. But you’ll need to prove you can afford the monthly payments and have a desire to repay the loan.
Property Description
A key part of the process for both the USDA guaranteed and direct loans is finding an appropriate property. The property will need to be structurally sound, functional and in decent repair. Plus, it must be in a qualifying rural location, which can be determined by checking the USDA eligibility tool.
USDA direct loans have an additional requirement that the home must be less than 2,000 square feet. In either case, the property will have to undergo a home appraisal to ensure it meets the criteria before the loan is finalized.
