USDA Single Family Housing Loans: Direct Versus Guaranteed

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In Texas and other U.S. states, USDA Rural Development runs over fifty financial assistance programs and services for various rural applications. Even for single family units, it offers two major housing loan programs: Direct and Guaranteed. Most people often confuse between the two programs. They have their own key differences, which we will discuss briefly in this blog post.

1. Borrower Eligibility

There are various factors that determine the eligibility of an applicant for USDA Single Family Home Loans. The important factors are categorized in the following three sections:

Income

Direct Home Loans: This type of home loan caters to very low-income families. Income is considered very low when it is below 50 percent of the area median income. Whereas, the low-income lies between 50 and 80 percent of the area median income.

Guaranteed Loans: This type of home loan is appropriate for average income borrowers, as loan applicants must have an income of up to 115 percent of the median income for the area in which they wish to buy a home.

Credit Requirements

Direct Home Loans: Direct USDA Loan applicants must have a good credit history and the ability to pay USDA monthly mortgage costs on time. They must also not be eligible for other mortgages as the loan caters to very low-income people and the government offers payment subsidies to help with their repayments.

Guaranteed Loans: This type of home loans are subject to the income and credit requirements of both the USDA and lender. Most lenders require borrowers to have a credit score of at least 620, without foreclosures, bankruptcies, or any other major delinquencies in their past. The applicants must showcase a decent credit history and the ability to timely pay mortgage, taxes, and insurance dues each month.

Loan Terms

Direct Home Loans: This type of home loan has the standard 33 years payback period. It also offers a 38 years payback period for very low-income applicants. The Housing and Community Facilities Programs (HCFP) sets the interest rates for the mortgages. The interest rate can be predetermined if the borrower uses the payment assistance subsidy.

Guaranteed Loans: Guaranteed Loans are fixed at 30 years, however, they do have a 15-year option beginning in September of 2014. According to the Guaranteed Rural Housing Loan, Section 502, it is your USDA-approved lender that determines your interest rate and not the USDA.

2. Property Eligibility

Direct Home Loans: Direct loan financed properties must:

  • Have the area of 2,000 sq.ft. or less
  • Have the market value within the applicable limit of area loan
  • Not have in-ground swimming pools
  • Be non-commercial

Guaranteed Loans:

Guaranteed loan financed properties must:

  • Be located in a USDA-eligible area
  • Be one of the eligible property types, which includes existing homes, modular homes, new construction, Planned Unit Developments (PUD’s), and eligible condominiums.

3. Benefits of the Program

Direct Home Loans: Direct loans are beneficial for very low-income individuals as they can own a home in a rural area, which they could never have done with their income or savings.

Guaranteed Loans: Guaranteed loans boast great benefits, some of which include:

  • 100 percent financing
  • Inclusion of renovation and repair costs in the loan amount
  • Closing costs and lender feed rolled into the loan
  • No maximum purchase price
  • Grants, Mortgage Credit Certificates (MCC), gifted funds, and seller concessions are accepted.

4. Source of Funding

Direct Home Loans: In USDA Rural Development Direct Loan 502 Program, the government directly funds borrowers.

Guaranteed Loans: Although government supports a portion of the guaranteed loan, borrowers must visit approved lenders to access the loans.

Way Forward

We discussed some of the key differences between USDA direct and guaranteed single family housing loan programs. Hope this information helps you make an informed decision when choosing a single family unit home loan program. If you need a low-interest home loan program in Texas, USDA loans are a great choice.

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