If you’re a home buyer searching for a new house in a rural area, a USDA loan can help you finance the purchase more easily. But as you explore your options, you’ll quickly discover there’s more than one type of USDA loan. Among the most versatile options are USDA guaranteed loans and USDA direct loans.
Each loan offers different benefits geared toward helping borrowers interested in buying in rural areas qualify for a great mortgage.
Although Rocket Mortgage® doesn’t currently offer USDA loans, it’s still worth familiarizing yourself with this type of financing. Let’s take a look at USDA guaranteed versus direct loans and how each type of financing works.
USDA loans are mortgages created through the United States Department of Agriculture. Even though both loans are associated with the USDA, they work differently. Before we dive into the differences between the two loan types, you’ll need a basic understanding of each option.
Let’s take a closer look at what USDA guaranteed loans and direct loans are. Then, we’ll explore how they work.
The USDA guaranteed loan is available to low- to median-income families. These loans are backed by the USDA to protect against default but are issued by a private lender. Since they’re made available by private lenders like banks and credit unions, guaranteed loans are typically easier to find than direct loans and are a more popular choice for rural home buyers.
To qualify, you won’t be able to make more than 115% of the area’s median income.
The USDA guaranteed loan is backed by the federal government, but a private lender will fund the loan itself. With the backing of the federal government, lenders can provide a lower interest rate to you as a borrower. This can help you get into a nicer home with a lower monthly mortgage payment.
USDA direct loans, like guaranteed loans, are designed to help low-income borrowers in rural places secure homeownership. These loans are less widely available, but it’s possible to obtain a USDA direct loan through the USDA.
In this case, the USDA itself acts as the lender and provides the funds to purchase the property. That means you won’t have to work with a private lender, but you’ll work directly with the USDA.
Although the actual lender will vary, the primary benefits of a USDA loan are available through both the guaranteed and direct option. As the borrower, you can get into a home with no down payment and no mortgage insurance.