A guide to USDA direct and guaranteed loans

A USDA loan can help you finance a rural home purchase. As you explore your options, you’ll quickly discover there’s more than one type of USDA loan. The most versatile financing options are a USDA direct loan and USDA guaranteed loans.

Each loan offers different benefits to help borrowers interested in buying a home 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.

What are USDA direct loans and guaranteed loans?

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 explore the differences between a USDA direct loan and USDA guaranteed loans.

USDA guaranteed loan

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 homebuyers.

To qualify, you won’t be able to make more than 115% of the area’s median income. In addition, the home must be the primary residence.

The USDA guaranteed loan is backed by the federal government, but a private lender funds the loan. With the backing of the federal government, lenders can provide a lower interest rate to you as a borrower. This can help you purchase a nicer home with a lower monthly mortgage payment.

USDA direct loan

USDA direct loans, like guaranteed loans, are designed to help low-income borrowers in rural areas secure homeownership. These loans are less widely available. For direct loans, the USDA acts as the lender and provides the funds to purchase the property. That means you won’t have to work with a private lender. Instead, you will work directly with the USDA.

Both USDA guaranteed loans and direct loans offer the same primary benefits: no down payments and no mortgage insurance.

USDA guaranteed vs. direct loan: What’s the difference?

These government loans both provide opportunities for affordable homeownership in rural areas, which is   helpful for first-time homebuyers. However, the two loan programs have some key differences. Here’s what you need to know.

Income limits

USDA guaranteed loans serve 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 2025 is $112,450 for a one- to four-member household. Meanwhile, the limit is $148,450 for a five- to eight-member household.

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 understand 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 will 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.

While credit score requirements are not stipulated by the USDA, applicants 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. But you’ll need to prove you can afford the monthly payments and repay the loan.

Property description

A key part of the process for both the USDA guaranteed and direct loans is finding an appropriate and qualifying property. The property will need to be structurally sound, functional and in decent condition. Plus, it must be in a qualifying rural location, which can be determined by checking the USDA eligibility tool.

USDA direct requires that the home must be less than 2,000 square feet. Both direct and guaranteed USDA loans also require the property to undergo a home appraisal, ensuring it meets the financial criteria before the loan is finalized.

The benefits of a USDA direct loan vs. guaranteed loan

USDA home loans offer many benefits to homebuyers looking for a dream home in rural areas. Let’s break down the benefits of USDA direct loans versus guaranteed home loans.

Benefits of USDA guaranteed loans

USDA guaranteed loans have several advantages over a conventional mortgage. The major benefit of this loan is that they do not require a down payment; guaranteed loans also have no loan limits. Here is the full list of benefits tied to USDA guaranteed loans:

• No down payment requirements. You’re able to finance up to 100% of the home’s purchase price and skip the process of saving for a down payment.
• Available for different types of properties. You can use a USDA loan to finance standalone homes, manufactured homes, condos and other types of properties as long as they’re in a qualifying rural area.
• No upfront closing costs. Lending fees and closing costs are “rolled into” the loan. That means you’ll have to provide less cash upfront.
• The option to add repair and remodel costs to the loan. Repair and remodel costs can be “rolled into” the loan. Not every home is move-in ready, and this can help you finance the cost of repairs without taking out an extra loan.
• Relaxed credit score requirements. A less-than-perfect credit score won’t hold you back. There is no listed minimum acceptable credit score, and the underwriter will determine if your credit score is acceptable on a case-by-case basis.

Benefits of USDA direct loans

Low-income borrowers have a lot of advantages through the USDA direct loan program. With lower credit requirements you can finally afford homeownership. Here’s a list of the benefits of this loan:

• No down payment requirements. You’re able to finance up to 100% of the home’s purchase price with a USDA direct loan.
• Finance repairs and renovations. Funds can be used to build, repair, renovate or relocate a home.
• Below market interest rates. USDA direct loans often have low interest rates. The government sets rates, which may help you save on interest payments.
• Longer repayment terms. USDA direct loans have longer repayment periods than other mortgage types, helping you spread out the cost of homeownership over a longer period of time.
• Flexible credit score requirements. You may be able to qualify for a loan with a less-than-perfect credit score.

What are the downsides of guaranteed USDA loans vs. direct USDA loans?

There are notable downsides with both USDA guaranteed and direct loans. Here’s what you should be aware of before committing to either type of USDA loans.

• Strict geographical requirements. The program is designed to encourage rural development, which limits you to buying in specific rural areas.
• Loan availability only for primary residences. You can’t buy a second home with this loan.
• Difficult refinancing requirements. USDA streamline refinancing comes with strict limitations, and refinancing can be a challenge.
• Some added fees. USDA guaranteed loans come with two additional fees: a one-time guarantee fee (typically 1% of the loan amount) and an annual fee of 0.35%.

How do I apply for a USDA direct or guaranteed loan?

Ready to apply for a USDA guaranteed or direct loan? You’ll need to follow slightly different guidelines depending on which loan you choose.

Applying for a USDA guaranteed loan

You can apply for a USDA guaranteed loan directly through a private lender. Once you submit your application, the lender sends the paperwork to the Guaranteed Underwriting System (GUS).

When you receive your interest rate on the loan, make sure it fits your budget. Also, don’t forget to budget for the two fees associated with the loan. The first is an upfront fee equal to 1% of the loan amount. The second is an annual fee equal to 0.35% of the loan amount.

Applying for a USDA direct loan

The USDA direct loan won’t involve a private lender. Instead, you must complete a USDA direct loan application at your local rural development office.

Unlike the USDA guaranteed loan, which comes with an annual guarantee fee that acts similar to mortgage insurance, applicants for a direct loan will not need to budget for any mortgage insurance fees with the direct loan. In addition, applicants may be able to qualify for a lower interest rate compared to the rate they would receive with a guaranteed loan.

The bottom line: Don’t sleep on these rural housing loans

Now that you’re aware of the differences between USDA guaranteed and direct loans, you should have a better understanding of the type of USDA loan for which you might qualify. Rocket Mortgage doesn’t offer USDA loans, but USDA loans are just one type of mortgage designed to help low- to moderate-income borrowers get into a great home. If you’re ready to explore your options for other types of traditional and nontraditional mortgages, apply online today. The team at Rocket Mortgage can help you find the best financing for your needs and budget.