Which Type of USDA Loan Program is Right for You?

Home buyers in the rural areas with low to moderate income can qualify for a USDA loan. This loan lets them take advantage of 100% financing and flexible guidelines. The USDA provides two loan programs and knowing your options ensures you pick the one that suits your situation. Read on to understand how each loan program works and what benefits you can get from choosing them.

USDA Guaranteed Loan

This loan program works like an FHA loan as the USDA guarantees the loan for lenders. This means that the USDA will pay the loan of the borrower should the latter default on their loan.  This enables lenders t give loans to applicants who have less than perfect credit or low income.

Although the USDA doesn’t provide the funds for the loan, they have a say on the approval of the loan. After the lender approves the loan, they should send a complete underwriting package to the USDA to get a stamp of approval before they can permit the borrower to close.

Borrowers can be eligible for this loan if they have a total household income of less than 115% of their area’s average income. This means that all income from the family members who live with the borrower will be counted. Those who are eligible for the loan can apply with their co-borrower. At this stage, it is up to them and their co-borrower to meet the requirements.

USDA Direct Loan

This loan comes directly from the USDA. There is no lender involved. Borrowers who make between 50% and 80% of the average income of their area are eligible for this loan. This loan is designed to help low-income families to afford suitable living. This loan is offered in 33-year and 38-year terms with an interest that is based on the market instead of the discretion of the lender.  You can get more details on this at

This loan does not set specific credit requirements. The USDA just needs to determine that the borrower can qualify for other financing options. Also, they have to ensure that the house has a modest size and is safe and owner-occupied, to qualify borrowers. But there is a 41% total debt ratio set by the department for this program. This is to ensure homeownership is not a burden for the borrowers.

Usually, those who are looking to take out a direct loan don’t need a down payment or pay the closing costs. But, the borrower might be asked to take care of a part of the closing cost if the USDA finds out they have enough assets. On average, the closing cost that borrowers should pay is around $1,000. Finally, borrowers will need to attend housing counseling as required by the USDA. This is meant to ensure they understand the debt they are incurring and its effects on tier finances.

Average borrowers with moderate income may qualify for a guaranteed loan while those with very low income and few assets can choose direct loans. Either loan is designed to help families own a home and hopefully improve their financial situation.

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