Guaranteed vs Direct USDA Loan: Which is Better?

Which USDA refinance program is right for you?

Modest cape cod houseWhen you are buying a home, there are many different types of mortgages to choose from. One popular option is the USDA loan.

This loan is guaranteed by the United States Department of Agriculture, making it a good choice for borrowers who may not qualify for a traditional mortgage.

However, there is also a direct USDA loan available. This loan is offered through the USDA Rural Development Program, and it has some advantages over the guaranteed option. Here are some of the key differences:

Loan Amount: The direct USDA loan offers a higher loan amount than the guaranteed option. This can be helpful for borrowers who need a larger loan to purchase a home.

Interest Rate: The direct USDA loan also offers a lower interest rate than the guaranteed option. This can save you money on your mortgage payments over the life of the loan.

Closing Costs: The direct USDA loan also offers lower closing costs. This can be helpful for borrowers who are tight on cash.

There are some other differences between the two loans as well, so be sure to consult with a USDA loan specialist to learn more. Both the guaranteed and direct USDA loans offer great benefits, so it really comes down to what is the best option for you.

Difference Between USDA Guaranteed Loan and USDA Direct Loan

When you are in the market for a new home, you have a lot of options to choose from. One of the most important decisions you will make is what type of mortgage to get. There are two main types of mortgages: guaranteed and direct. The main difference between the two is how the government is involved.

With a guaranteed mortgage, the government guarantees the mortgage lender against default. This means that if the borrower defaults on their loan, the government will step in and pay the lender for the money they lost. This guarantee is provided by the Federal Housing Administration (FHA) or the Veterans Administration (VA).

A direct mortgage is a mortgage that is insured by the government, but not through a guarantee. The main program that offers direct mortgages is the USDA Rural Development Loan.

There are several advantages to getting a guaranteed mortgage. They are available to a wider range of borrowers, including those who have a lower credit score or less money saved for a down payment. This can be really helpful if you lose your job or experience some other unexpected event.

The main advantage of a direct mortgage is that the interest rates are usually lower than those of a guaranteed mortgage. This is because the government is taking on more risk by guaranteeing the mortgage. However, direct mortgages are only available to certain borrowers, such as those who live in rural areas or who are buying a home for the first time.

When you are deciding which type of mortgage is best for you, it is important to consider your needs and budget. If you are a first time homebuyer or you live in a rural area, a direct mortgage may be the best option. If you have a lower credit score or you need help with your down payment, a guaranteed mortgage may be a better choice.

The Section 502 direct financing program was created to provide very low- and low-income individuals and families with a path to acquire, construct, remodel, and upgrade, their homes located in rural areas.

The typical loan length for a Section 502 loan is 33 years. The extended duration decreases the monthly payment on the loan. Homeowners may make additional loan payments in order to shorten the repayment period.

Loans may be established for a significantly shorter period of time, and in certain situations stretched out to 38 years.

The Agency, according to Section 501 of the 1949 Housing Act, sets the interest rate for the direct USDA home loans.

Eligible borrowers may qualify for repayment assistance in order to reduce their monthly finance installments.

In summary, applicants must meet the following criteria to be eligible for Section 502 funding:

  • Have an adjusted gross income that is equal to or less than the appropriate low-income threshold.
  • Have adjusted wages that are equal to or less than the applicable moderate-income threshold for assumed loans or loans to purchase a REO property.
  • Be unable to obtain an acceptable credit report from another source;
  • Agree to live in the residence personally;
  • Satisfy citizenship or qualified noncitizen requirements;
  • Possess the legal ability to incur a financial obligation and are not banned or barred from participating in Federal programs; and
  • Demonstrate both the will and capability to repay the loan.

USDA Direct Loan Property Requirements

  • Typically be 2,000 square feet or less
  • Not have market price in excess of the appropriate location loan limitation
  • Not have in-ground pool
  • Not be developed for earnings producing activities

USDA Direct Income Limits

Prospective home buyers must meet the income guidelines for low income eligibility for a direct loan. Income eligibility look up. Please pick your state from the dropdown menu.

Happy coupleThe Single Family Housing Direct Self- Assessment tool provides prospective home buyers with a preliminary income calculation. The prospective applicant(s) inputs basic household information such as household size, monthly income, monthly debts, property location, expected property taxes, and estimated hazard insurance.

USDA takes into account the total amount of money each adult in a home makes each year, even if they aren't part of the financing.

Take a look at your paystub or W-2 to figure out what you make at home. It's not as easy as that! The USDA looks at adjusted annual income, which takes into account expenses like child care, other commitments, and medical costs.

Seller Paid Closing Costs

The USDA permits the home seller to pay up to 6% of the home buyer's closing costs. Please note that the home seller is not required to provide assistance, but can offer the monetary assistance as a sales concession. Any assistance must be stated in the sales contract.

How Do I Apply for a USDA Direct Loan?

Contact your local USDA office.


In conclusion, it is important to weigh the pros and cons of each type of loan before making a decision. A direct USDA loan may be a better option for some, while a guaranteed USDA loan may be a better option for others. It is important to consult with a qualified mortgage lender to determine which type of loan is best for you.