One thing many potential borrowers are unaware of is that there are two distinct types of USDA loans, the Direct and the Guaranteed.
The USDA Guaranteed Loan is facilitated by traditional lenders such as banks and mortgage companies. It allows borrowers to have incomes up to 115% of the median area income. This type of loan is appealing to borrowers who meet income eligibility requirements but may not qualify for conventional financing.
On the other hand, the USDA Direct Loan is funded directly by the USDA and is intended for very low to low-income households. This loan option is more restrictive in terms of income eligibility, allowing households with incomes up to 80% of the median area income. It is designed to provide affordable housing opportunities to those who may not qualify for other financing options.
Both loans have similar property eligibility requirements. First, although often referred to as a farm loan, neither actually covers farms. Multi-unit properties and existing manufactured homes are also ineligible for both loans. The home must be modest in cost. Also, the home must meet the thermal standards of the Rural Housing and Community Development Service. Homes must be move-in ready and not have major structural deficiencies. The loan may not be used on income-producing properties and the water and sewage system must meet the State Department of Health ’s requirements.
One reason the USDA loan can take on less than prime credit scores, is that lenders are more lenient because of the fact that they are guaranteed by the US government. Now although the USDA loan doesn’t have its own specific requirements in regards to credit, doesn’t mean just anyone can qualify. Lenders specify what their credit requirements are and for the Guaranteed loan, the lowest many lenders will need is a minimum of a 620 , at the least.