One thing many potential borrowers are unaware of is that there are two distinct types of USDA loans, the Direct and the Guaranteed. The Direct loan is intended for very low to low incomes. Unlike the guaranteed which is funded by a bank or traditional lender, the Direct is actually funded directly by USDA. The Guaranteed loan allows a borrower’s income to be up to 115% of the median area income. However, the Direct only allows a household’s income to be 80% of the median area income.
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.