The USDA offers two types of loans – Direct and Guaranteed. They both have the same result – they help you buy a home. Which program you qualify for depends on your situation, though. It’s not a matter of which program is easier to qualify for. Instead, it is which program do you fit into? Eligibility focuses on your family’s income. We discuss the differences below.
UDA Direct Loans
USDA Direct loans come right from the government. You don’t go to a bank or mortgage broker. Instead, you visit your local USDA office. Borrowers eligible for this program can’t make more than 80% of the area’s median income. You can find out how your income falls on the USDA’s income chart.
Another large requirement for the Direct program is you can’t be eligible for any other loan program. Even FHA or VA eligibility renders you ineligible for this program. The program helps borrowers who would otherwise be without a suitable home. In fact, you must be without suitable housing in order to qualify for the program.
The government subsidizes Direct loans in different ways. For some, they may lower the interest rate to as low as 1% to make the payment affordable. For others, they may extend the repayment period beyond 30 years. You may see terms like 33 or 38 years. If your income exceeds 60% of the area’s median income, though, 33 years would be the maximum term.
This loan program doesn’t have a specific credit score requirement. They request a “decent” credit score. This is a subjective term though. Try to keep your credit history as clean as possible for at least the last 12 months. This will help your chances of loan approval.
USDA Guaranteed Loans
The Guaranteed loan program does not come from the government. The USDA still has a say in your loan approval, though. But, you do work with a lender. You must find a USDA approved lender first. The USDA guarantees these loans. This means they pay the lender back if you default on it. Because of this, the USDA has the final approval on your loan. This is only after the lender approves it and sends a full package to the USDA office.
For this program, you can’t make more than 115% of the area’s median income. The guidelines are much more liberal, as you can see. You can use the same USDA chart as above to determine where you fall. Make sure you select Guaranteed program when determining eligibility, though.
Something to keep in mind, the USDA considers household income, not just the borrower’s income. For example, if you have grandparents or other relatives living with you, their income counts. The USDA counts the income of every person in the home that is over the age of 18. This is not your qualifying income, though. Only the income of the borrower and co-borrower count for qualifying. This means the income that counts towards your debt ratio.
Just like with the Direct program, you can’t be eligible for any other financing. You must also be without suitable housing. The USDA program should help you secure safe and sanitary housing in a rural area.
The credit score requirements for Guaranteed loans are a bit stricter too. You must have a score of at least 640 in most cases. Some lenders may be able to make an exception with compensating factors. This means things like a low debt ratio, assets on hand, or long-term and stable employment.
This program also requires debt ratios no higher than 29/41. This is especially important if you have a credit score around 640. Higher credit scores may allow slightly higher ratios with a debt ratio waiver form approval. This means your housing payment may not exceed 29% of your gross monthly income. Your total debt may also not exceed 41% of your gross monthly income. This means any credit card, student loan, or car payments. You don’t have to include things like regular cost of daily living or monthly utility bills.
The term for the Guaranteed program will not exceed 30 years. The USDA has no bearing on the interest rate charged, either. It varies by lender. In this case, it pays to shop around with different lenders. This is especially important if your debt ratios are close to the maximum allowed. A lower interest rate could mean the difference between an approval and denial.
The Common Factors
Both USDA loan options have some things in common. For instance, you can borrow up to 100% of the value of the home with both programs. This means no down payment. Also, the home must be livable. This means safe and sanitary. It must pass the USDA appraisal requirements in order to qualify. You should be able to move into the home within a short time after closing on the loan. If it needs major rehab, it likely won’t pass the USDA guidelines.
Lastly, you can roll your closing costs and the USDA upfront mortgage insurance. This may put your loan over 100% of the home’s value, but it’s allowed in these programs.
If you are unsure about which USDA program you qualify for, you can talk to a loan officer. Once they figure out your income and how it compares to the USDA limits, you can determine the right program.
No matter which program you qualify for, they are both easy to understand. You need the basic documents you need for any other loan in order to qualify. This means paystubs, W-2s, tax returns, and bank statements. For either program, you should minimize your debts and keep your credit history clean. While you don’t need the 700 credit scores that conventional loans need, you still need decent credit. Without it, lenders may view you as too risky for a loan.
The more attractive you may your loan file, the better. Even if you are dealing directly with the government, they guarantee these loans. They want to make sure you are not a high risk for default. The more compensating factors you can provide, the better your chances of loan approval for the USDA loan program. Both the Guaranteed and Direct program offer many benefits for borrowers!