Whether your income level qualifies as moderate, low, or even very low, the U.S. Department of Agriculture offers options to potentially finance your new home if it’s located in an eligible rural area. USDA mortgages, such as the USDA Single-Family Housing Direct and Guaranteed Loan programs, can help you purchase property in a way that’s financially comfortable for you.
So what’s the difference between USDA Direct and Guaranteed Loans? Read on for more information about the best option for you.
What is a USDA Guaranteed Loan?
USDA Single-Family Housing Guaranteed Loans allow low- to moderate-income applicants to purchase homes in eligible rural areas. And since the U.S. government insures these products, OVM Financial can offer the following loan benefits:
- Funds to purchase, build, relocate, or rehabilitate a home
- Lower interest rates than FHA or conventional loans
- 100% financing for primary dwellings
- No down payment requirements
- 30-year, fixed-rate mortgages
Even though you’re not required to make a down payment, doing so can lower your overall interest expense and provide a bit more leeway in your monthly budget.
What is a USDA Direct Loan?
If you’re unable to obtain proper housing or secure a home loan from another resource, the USDA Single-Family Housing Direct Loan may be able to help. The USDA can provide low- to very-low-income applicants subsidized payment assistance to temporarily reduce mortgage payments. If you qualify, a direct loan can increase your ability to repay your mortgage.
Unlike Guaranteed loans, Direct loans do come with a loan limit, which is typically $336,500 but can reach up to $970,000. These loans typically feature a 33-year term and include many of the same benefits of guaranteed loans. You simply have to meet the following requirements:
- Occupy the property as your primary residence
- Possess the legal capacity to obtain a loan
- Meet citizenship and eligible noncitizenship requirements
- Be eligible for participation in federal programs
- Purchase property in a USDA-eligible area
A USDA Guaranteed Loan is typically the best option for most USDA-eligible home buyers. However, if you are a low-income borrower with limited credit, the USDA Direct Loan would be a great alternative option to help you purchase your home.
If you’re interested in the USDA Direct Loan it’s important to note that this loan option is offered only by the USDA. However, our team can support a USDA guaranteed loan purchase.
What makes a property USDA-eligible?
Whether you choose to pursue a USDA direct or guaranteed loan, the property you purchase has to meet certain eligibility requirements. The USDA Economic Research Service defines “rural” based on a county’s population as well as its geographic and economic features. In order to have access to USDA home loan funds, your new home must be located in one of the following types of places:
- Open countryside (a home on acreage, for example)
- A rural town with a population of 2,500 or less
- A town with a population of up to 10,000 people if it is rural in character
- An urban area that is not classified as part of a larger metropolitan area (as in it’s not a suburb of a major city) with a population of 2,500 to 49,999 people
Properties in a larger town may still meet USDA property eligibility requirements if the locality has little to no mortgage loan access for low- to moderate-income families. Additionally, qualifying homes for USDA Direct Loans are generally 2,000 square feet or less and can not be designed for income-producing activities.
For more information about the difference between USDA Direct and Guaranteed Loans or to apply for one of these options, reach out to an OVM Financial professional today. You can also read more about topics, such as what is a guaranteed USDA loan and how much can you borrow with a USDA loan, on our blog.